What is the effect of accounting for investments under the equity method?

When accounting for investments under the equity method, the primary effect is that it allows recognition of the investee's income. This method is used when an investor has significant influence over the investee, often indicated by ownership of 20% to 50% of the voting stock.

Under the equity method, the initial investment is recorded on the balance sheet at cost. Subsequently, the investor recognizes its proportionate share of the investee's profits or losses in the income statement. This means that any income generated by the investee will affect the investor's financial statements even if the profits are not distributed as dividends. This approach provides a more accurate representation of the investor's investment in the company by capturing the financial performance of the investee rather than just the cash flow received in the form of dividends.

The other available choices present differing perspectives that do not fully capture the essence of the equity method. Dividends are indeed important, but they are not recognized directly as income; rather, they reduce the carrying amount of the investment. Additionally, only recording profits without recognizing losses would misrepresent the investor's stake, and delaying adjustments until the sale of the investment overlooks the ongoing financial influence the investee's performance has on the investor's financial position. Thus