2. The equity method of accounting for investments in unconsolidated subsidiaries permits the investor to recognize as investment income the investors percentage ownership share of the investees reporting income rather than recognizing income only to the extent of cash dividends actually received. The net effect is that the investor, in most cases, records more income than is received in cash. Using research into FASB pronouncements, your financial analysis experience, and your text book, answer two of the following questions:

What are the theoretical problems with regard to the recognition of equity income?

What impact that this have for financial analysis and can the equity method be used to manipulate earnings?

If a company is using the equity method instead of the fair value method, what does this tell you about the level of control over an equity investment?

What is the rational for restatement when the equity method becomes applicable through a series of acquisitions?

Currently fair value can be used to account for an equity level investment (opting for use of fair value reporting must be made in the first year the investment can be reported under the equity method). Is the accounting profession confusing financial statement users by reporting equity level investments under more than one set of standards?