- CFA Exams
- CFA Level I Exam
- Topic 3. Financial Statement Analysis
- Learning Module 10. Intercorporate Investments
- Subject 4. Joint Ventures
CFA Practice Question
The proportionate consolidation method:
B. Results in lower net income than the equity method.
C. Results in the same net income as the equity method.
A. Results in higher reported net income than the equity method.
B. Results in lower net income than the equity method.
C. Results in the same net income as the equity method.
Correct Answer: C
The proportionate consolidated method recognizes sales and expenses of the investee company at an amount equal to the percentage of the stock owned. This differs from full consolidation which records 100% of the sales and expense, then backs out the percentage owned by minority investors as an additional expense to arrive at net profit. Proportionate consolidation results in the same net income as the equity method.
User Contributed Comments 5
| User | Comment |
|---|---|
| americade | I presume consolidated and equity results in same equity, too? |
| ilzina | Why? Net income is the same for equity and consolidated type. I would think that income is lower under proportionate consolidation (only proportions of sales, expenses are included vs. full amounts in standard consolidation). |
| bmeisner | Net income is the same for each method, the only difference between equity and proportionate consolidation is that the balance sheet items for the investee are also included on the investor's balance sheet for proportionate. |
| jmcarr02 | Proportionate consolidation occurs in joint ventures, so there is no minority interest. |
| davidt876 | the notes and my cursory google research say that both IFRS and US GAAP require the equity method for joint ventures |