Moneyzine
Contents
/Investment Guides /Revenue from Investments in Stock

Revenue from Investments in Stock

Moneyzine Editor
Author: 
Moneyzine Editor
3 mins
November 6th, 2024
Advertiser Disclosure

Definition

The term revenue from investments in stock refers to an approach companies can use to determine when to record income generated by their investments in common stock. There are several methods a company can use to account for these long and short-term investments. Each method has a slightly different approach to account for a stock's change in value or dividends received.

Explanation

Companies can make both long and short-term investments in the common stock of another company. When making a long-term investment, ownership falls into three categories: controlling interest, significant influence, and passive interest. Depending on the ownership interest status, a company would use the equity, cost, or lower of cost or market method to record transactions associated with dividends received or a change in the value of the securities held.

Each of the three methods to record revenue from investments in stock is listed below. This includes the ownership characteristics, as well as the implications to the balance sheet and income statement.

Equity Method: Characteristics

Applies when a company has:

  • Controlling Interest: 50% or more of the voting stock is held by the company (investor).

  • Significant Influence: 20% to 50% of the voting stock is held by the company (investor), with significant influence over the decision making process of the investee.

Accounting treatment:

  • Balance Sheet: all investments are carried at historical (acquisition) cost, periodically adjusted for the investee's earnings or losses. Dividends received lower the carrying value of the investment.

  • Income Statement: a proportional share of the investee's net income is recognized as an increase to revenues, while a loss and the payment of dividends would decrease the value of the investment and flow to the income statement.

Cost Method: Characteristics

Applies when a company has:

  • Passive Interest: the company (investor) holds less than 20% of the investee's voting stock or is unable to exert significant influence over the decision-making process.

Accounting treatment:

  • Balance Sheet: all investments are carried at historical (acquisition) cost until sold. Adjustments to the carrying value should also be made if it's clear that original cost is no longer a justifiable value. For example, the investee might declare a liquidating dividend.

  • Income Statement: dividends received from the investee are recorded as revenue on the investor's income statement.

Lower of Cost or Market: Characteristics

Applies when a company has:

  • Marketable Equity Securities: typically includes current assets where the investor does not have significant influence over the decision making process of the investee.

Accounting treatment:

  • Balance Sheet: all investments are carried at their aggregate historical (acquisition) cost or market value, whichever is lower. Adjustments to the carrying value should be made each time the balance sheet is prepared.

  • Income Statement: the excess of cost over market value are included in net income when held as a current asset. The excess of aggregate cost are included in the equity section of the balance sheet if the asset is noncurrent.

Related Terms

marketable securities, ownership interest, equity method, cost method, lower of cost or market

Explore Investing Further

  • Trading has never been easier, thanks to the rise of online platforms that enable you to buy and sell various assets at the click of a button. But with so many options available, it can be challenging to decide which platform is right for you.
  • Looking for a way to avoid swap fees while trading forex?
  • By providing instant diversification for your portfolio, investing in ETFs can amplify the potential of any investor, novice or seasoned alike. We scoped the market to curate a list of the best ETF trading platforms available for US investors.
  • Our top beginner's pick for copy trading is eToro. Read on for more details, plus seven good alternatives.
  • Swing trading stocks can be a great way for investors to take advantage of short-term stock market movements and gain significant returns. If you're interested in swing trading, the key to success lies in selecting the right stocks to buy and sell quickly for a profit.
  • The table below lists the best stock picks under $2, listed on public exchanges.
  • The table below lists the best stock picks under $1, listed both on public and OTC exchanges.
  • This section will highlight the best EV-trading penny stocks available in the United States.
  • The demand for sustainable energy has grown rapidly in recent years. This has resulted in increased scrutiny of the automotive market. As a result, the electric vehicle (EV) industry has made significant advancements.
  • Intelligent Bio Solutions Inc. is a life sciences company, founded in 2016 with headquarters in New York and is engaged in performing diagnostic tests, real-time monitoring, and non-invasive surgery for its patients. The firm has developed a CoV-2 Biosensor, which can be used in RNA virus detection.
  • Hour Loop was founded in 2013 with headquarters in Redmond, Washington. It’s an online retailer involved in e-commerce in the United States that hit the public markets on Jan 7th of 2022. The company sells home/garden decor, electronic products, kitchenware, and apparel through walmart.com, amazon.com, and hourloop.com.

Related Content

  • Biden Or Trump: Who Is Better For The Economy And Stocks?
    Yup. This is one of those articles. It's an election year, and here in the U.S., we get to decide which old dude who’s been alive long enough to remember when there were only 48 states in the U.S. will be the leader of the free world.
    March 19th, 2024
  • When it comes to strategic business planning, accounting is front and center, shaping the course of action. At least it should be.
    March 14th, 2024
  • How To Invest in Real Estate Without Becoming a Landlord
    We all know that in order to build wealth and prepare for retirement, investing is the key. However, it can be hard to figure out what to invest in and how to put your money to good use. One of the most talked about ways to build wealth is owning property and being a landlord to bring in passive income. But what if you don’t want to do that? You can still invest in real estate!
    November 15th, 2024
  • Investing In Nature: The Closest You'll Get To Your Money Growing On Trees
    ESG (Environmental, Social, and Governance) has become a polluted word for many traders and investors - but that doesn't mean it's going completely away. Nor does that mean you can't profit from nature or sustainable practices. But there are some opportunities in the regenerative ag, conservation, and green real estate spaces.
    February 29th, 2024
  • How to Invest $100 and Grow it to 6 Figures
    Turning $100 into six figures is a goal no one should realistically have. But it's the question you might ask yourself: Can it be done? Sure. Probable? It's less probable than winning the lottery, but technically still probable - like finding a needle in a haystack the size of Canada. But possible? Absolutely.
    October 29th, 2024

Contributors

Moneyzine Editor
The Moneyzine editorial team consists of writers and content specialists with diverse backgrounds.
Moneyzine 2024. All Rights Reserved.