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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 Consolidated F/S: Concepts & Standards 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
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