when the investee company pays a cash dividend the value of its net assets decreases using the equity method the investor company receiving the dividend records an increase to its cash balance but reports a decrease in the carrying value of its investment other financial activities that affect the value of the investee s net assets should have the same impact on the value of the investor s share of investment the equity method ensures proper reporting on the business situations for the investor and the investee given the substantive economic relationship they have 
example of the equity methodfor example assume abc co purchases 25 of xyz corp for 200 000 at the end of year one xyz corp reports a net income of 50 000 and pays 10 000 in dividends to its shareholders at the time of purchase abc co records a debit of 200 000 to investment in xyz corp an asset account and a credit in the same amount to cash at the end of the year abc co records a debit of 12 500 25 of xyz s 50 000 net income to investment in xyz corp and a credit in the same amount to investment revenue in addition abc co records a debit of 2 500 25 of xyz s 10 000 dividends to cash and a credit in the same amount to investment in xyz corp the debit to the investment increases the asset value while the credit to the investment decreases it the new balance in the investment in xyz corp account is 210 000 the 12 500 investment revenue figure will appear on abc s income statement and the new 210 000 balance in the investment account will appear on abc s balance sheet the net 197 500 cash paid out during the year 200 000 purchase 2 500 dividend received will appear in the cash flow from used in investing activities section of the cash flow statement alternative methods