Explain the cost, equity, proportionate consolidation and acquisition/consolidation methods and when we should use them - Essay Example

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This price includes profit acquired over cost incurred in producing the commodity (Datar, Rajan, Wynder, Maguire & Tan 2013). Cost method is used when accounting the stock purchases in another…
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Explain the cost, equity, proportionate consolidation and acquisition/consolidation methods and when we should use them
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FINANCE AND ACCOUNTING College: Finance and Accounting Cost Cost is the price of money used during the production of a commodity. This price includes profit acquired over cost incurred in producing the commodity (Datar, Rajan, Wynder, Maguire & Tan 2013). Cost method is used when accounting the stock purchases in another company.
Equity is the amount in money that is contributed by shareholders in any company. It includes retained profits and losses and also, equity represents the ownership in the company (Lewis 2008). This method is used when a particular company purchases the stock of another company. Thus the buying company gains control over management decisions.
Proportionate consolidation
This is a method used in bringing together all the accounts present in an agreement between two companies that are working together (Brown & Warner 2005) . This method is used when two companies have come together to conduct business. It requires that all the income items, all the liabilities as well as assets are included in a balance sheet at the set proportion. This is done through the participation percentage of the involved firms.
Consolidation methods
Consolidation is the act of merging two or more commercial entities. Consolidation occurs when the parent company puts in book the financial information of the investing company (Brown & Warner 2005).Therefore, this method is only use as a third option for accounting for the investments of the involved companies. Similarly, the investing company’s accounts are fully integrated in the investor company’s books.
Brown, S. J., & Warner, J. B. 2005. Using daily stock returns: The case of event studies. Journal of financial economics, 14(1), 3-31.
Datar, S. M., Rajan, M. V., Wynder, M., Maguire, W., & Tan, R. 2013. Cost accounting: a managerial emphasis. Pearson Higher Education AU.
Kothavala, K. 2013. Proportional consolidation versus the equity method: A risk measurement perspective on reporting interests in joint ventures. Journal of Accounting and Public Policy, 22(6), 517-538.
Lewis, C. J. 2008. U.S. Patent No. 6,513,019. Washington, DC: U.S. Patent and Trademark Office. Read More
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