Student’s Response:
According to the Equity Accounting Method, Coke will own between twenty and fifty percent of shares in another company that helps to produce it’s products. With this being said, Coke will not report this investment/shares in said company, but Coke will inherit a profit of what company B made for the year. Let’s say Coke invests in the label company that prints the Coke symbol on each product, and the shares amount to 35%. Let’s also say that this label company does really well and reports a profit of 2M at Year 1, Coke would inherit $700,000. Coke would report this on the their yearly income statement. By not reporting the information about the investment on their balance sheet, they are able to use that towards other things like another investment of purchases on materials, etc. On the other side of this, company B is able to inherit their earnings for the year and again, Coke will only report their part on the income statement. It would be smart to invest some of this cash into other investments to possibly bring in even more profit to the company.
Additional information:
The Coca-Cola Company reported over $20 billion of investments accounted for under the equity method in 2017, and they reported investment revenue of more than $1 billion in 2017. Explain why Coke accounts for some of its investments by the equity method and what that means? Is the over $1 billion in revenue reported in 2017 cash they can use? Provide an explanation for your response.