Arizona State University (ASU) ACC232 Financial Accounting I Exam 2 Practice

When using the equity method for accounting investments, dividends received from the investee are classified as non-operating income. This classification arises because the primary purpose of the equity method is to reflect the investor's share of the investee's earnings rather than treating the dividends as an operational return from sales or services.

Under the equity method, the carrying amount of the investment is increased by the proportionate share of the investee’s earned profits (known as the investor's share of net income) and decreased by dividends received. Thus, while dividends are distributed based on profits, they do not represent earnings generated through the investor's ordinary business operations, placing them firmly under the category of non-operating income.

Other categories like operating income and other comprehensive income are irrelevant here, as they pertain to different financial reporting aspects. Additionally, the option stating that no income is recognized does not apply since dividends do generate income, albeit classified differently than regular operating revenue.