Prior to GAAP for equity method investments, firms often used the cost method to account for their unconsolidated investments in common stock regardless of the presence of significant influence The cost method employed the cash basis of income recognition When the investee declared a dividend, the ...

The cost method of accounting for investments often caused a lack of objectivity in reported income ...

Prior to GAAP for equity method investments, firms often used the cost method to account for their

Question:

Prior to for equity method investments, firms often used the cost method to account for their unconsolidated investments in regardless of the presence of significant influence. The cost method employed the cash basis of income recognition. When the investee declared a dividend, the investor recorded °dividend income' The investment account typically remained at its original cost-hence the term cost method. Many firms' compensation plans reward managers based on reported annual income. How might the cost method of accounting for significant investments have resulted in unintended wealth transfers from owners to managers? Do the equity or fair-value methods provide similar incentives?
Common Stock
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on... GAAP
Generally Accepted Accounting Principles (GAAP) is the accounting standard adopted by the U.S. Securities and Exchange Commission (SEC). While the SEC previously stated that it intends to move from U.S. GAAP to the International Financial Reporting Standards (IFRS), the...