A company has reported its investment in the SPE (Special Purpose Entity) using the equity method, but an analyst believes that the consolidation method more accurately reflects the company's true financial position, so the analyst makes the appropriate adjustment to the financial statements.
(Question)
What are the likely effects on return on assets (ROA) and net profit margin (ignoring any tax effects) of correctly adjusting for the company's investment in the SPE using the acquisition method?
| ROA | Net profit margin | |
| A. | No change | Decrease |
| B. | Decrease | No change |
| C. | Decrease | Decrease |
| Accounting | IFRS | |
| Equity method → Consolidation (acquisition) method | ||
| Net income (NI) | → | |
| Total Assets | ↑ | |
| Revenue | ↑ | |
| ROA = NI/Total Assets | →/↑= ↓ | |
| Net profit margin = NI/Revenue | →/↑ = ↓ | |
Answer: C
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