1. Identify the accounts reported as operating

A company may invest in the preferred or common stock of another company.

• The company investing in another companys stock is the Investor.
• The company whose stock is purchased is the Investee.

The percent of the investees outstanding stock purchased by the investor determines the accounting method used to record the stock

Percent of Outstanding stock owned by an investor	Degree of Control of Investor over Investee	Accounting method
Less than 20%	No control	Cost method Investor records the investment at purchase price
Between 20% and 50%	Significant influence	Equity method the investor recognizes its share of the profits and losses of the investee in the periods when these profits and losses are also reflected in the accounts of the investee
Greater than 50%	Control	Consolidation the investor recognizes all assets, liabilities, revenues, expenses and gains/losses in its financial statements