1222743392 - 3-1 CHAPTER THREE The Reporting Entity and...

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1 3-1 CHAPTER THREE The Reporting Entity and Consolidated Financial Statements ACCT400 Advanced Financial Accounting Fall Semester 2008 3-2 Consolidated Financial Statements • Present financial position and operating results for a parent (controlling entity) and 1 or more subsidiaries (controlled entities) as if ALL individual entities actually were a single company • Required if one corporation owns majority of another corporation’s outstanding common stock (i.e. 2 corporations remain separate legal entity) • ALSO required for business creation (e.g. subsidiary) • NOT required for business combination under asset acquisition • SAME accounting principles for both separate and consolidated F/S
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2 3-3 • Usefulness – Only means of obtaining a clear picture of total resources of combined entity which is under parent’s control and results of employing those resources – More useful for stockholders, long-term creditors and management of parent than for those of subsidiaries • Limitations – Some useful information is lost (e.g. good performance hides poor performance) 3-4 • Standards: ARB 51 – Consolidated financial statements and FASB 94 – Consolidation of all majority-owned subsidiaries Traditional view of control • Control: Most important criterion in consolidation • Usually determined by proportion of voting shares owned directly or indirectly by another company • Control may exist in less than majority ownership when all remaining shares are widespread ownership • Direct control: Majority of a company’s common stock is owned by another company
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3 3-5 Indirect control or Pyramiding • A company’s common stock is owned by 1 or more
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1222743392 - 3-1 CHAPTER THREE The Reporting Entity and...

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