Which of the following statements is not correct concerning the effects on the components of return on equity (ROE) under equity method accounting?
A) Financial leverage is understated
B) Return on equity is affected, because of the noncontrolling interest portion of equity
C) Net operating profit margin is overstated
D) Total asset turnover is understated

Question

Quizplus · Accepted Answer

Asset turnover equals Sales/Average assets. The total asset turnover is understated due to nonrecognition of sales, but it is overstated by the nonrecognition of assets. As such, the net effect of equity method accounting on total asset turnover is indeterminate. Financial leverage is understated due to the nonrecognition of assets and the correct reporting of equity. Net operating profit margin is overstated due to nonrecognition of sales and the correct reporting of income.

Which of the Following Statements Is Not Correct Concerning the Effects