GCU ACC 502 Topic 4 DQ 2

Equity MethodSubject to Manipulation

Name of Student

Name of Instructor

Date

Equity methodsubject to manipulation

Although the equity approach was created to avoid manipulations, there is concern that corporations with considerable influence, defined as 20% or more, may use it to manipulate the affiliate’s dividend policies (Young, 2018). This strategy was intended to resolve one problem with dividend policy, but unintentionally created another. Stockholders have demonstrated that they have changed their ownership percentages in other businesses on occasions, based on if the partners report profits or losses (Young, 2018).

A common instance of this kind of manipulation is a firm acquiring ownership stakes in investee companies in order to maintain their impact underneath the 20% barrier. This would exclude them from reporting their portion of losses (Young, 2018). To identify this sort of behaviour, we must examine reported earnings to see if they are typically greater than cash flow and search for unexpected rises in inventory and sales proportions. This clearly demonstrates the need of properly monitoring the financial statements’ implications (Young, 2018)

After doing more study on earned capital, I discovered that it is a company’s net income. Earned capital may be reclaimed as profits if the company does not distribute the funds to shareholders in the form of dividends (Bragg, 2021). Thus, earned capital is primarily defined as the profits retained by an organization. Additionally, I discovered that earned capital is detrimental to a business that is losing money and beneficial to a business that is profitable (Bragg, 2021). I discovered that earned capital is distinct from paid-in capital. Paid-in capital is derived from the total of funds invested in the business by stakeholders, while earned capital is derived from earnings.

References

Bragg,S. (2021, April 12).Earned capital definition — Accounting Tools. Accounting Tools.https://www.accountingtools.com/articles/what-is-earned-capital.html

Young, S. D., Cohen, J., & Bens, D. A. (2018).Corporate Financial Reporting and Analysis: A Global Perspective. John Wiley & Sons.