Canadian Securities Course (CSC) Level 1 Practice Exam

What is share of profit of associates?

1. Refers to the interest earned by shareholders.

2. Profit gained from selling shares of associates.

3. A percentage of profit earned from sales.

4. When a company's investment in another company creates significant influence.

The correct answer is: When a company's investment in another company creates significant influence.

The concept of "share of profit of associates" relates to how a company accounts for its investments in other companies where it holds significant influence, typically defined as owning between 20% to 50% of the voting stock. In this context, "significant influence" implies that the investing company can participate in the financial and operating policy decisions of the associate, although it does not control the company outright. When a company reports its share of profit from associates, it recognizes its proportionate share of the associate's profits in its own financial statements. This is done under the equity method of accounting, where the initial investment is recorded at cost and subsequently adjusted for the investee's profits or losses, as well as any dividends received. The other options do not accurately describe the share of profit of associates. The interest earned by shareholders is not related to the performance of associated companies. Profit gained from selling shares pertains to capital gains rather than operational profits from associates. A percentage of profit earned from sales could refer to various profit-sharing scenarios but does not specifically capture the essence of significant influence in the context of associate companies.