Advanced Accounting Ch. 3 -...

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The Reporting Entity and Consolidated Financial Statements 3 Consolidated Financial Statements 0. Consolidated financial statements present the financial position and results of operations for a parent (controlling entity) and one or more subsidiaries (controlled entities) as if the individual entities actually were a single company or entity. 0. Consolidation is required when a corporation owns a majority of another corporation’s outstanding common stock and occasionally under other circumstances. 1. Two companies are considered to be related when one controls the other or both are under the common control of another entity. 2. The same accounting principles should be applied in preparing consolidated financial statements as in preparing separate-company financial statements. 3. More useful than the separate financial statements of the individual companies when the companies are related. Benefits of Consolidated Financial Statements 0. Presented primarily for those parties having a long-run interest in the parent company, including its management, shareholders, long-term creditors or other resource providers. 1. Often provide the only means of obtaining a clear picture of the total resources of the combined entity that are under the parent's control. Limitations of Consolidated Financial Statements 0. Results of individual companies included in the consolidation are not disclosed, thereby hiding poor performance. 1. Not all the consolidated retained earnings balance is necessarily available for dividends of the parent. 2. Financial ratios are not necessarily representative of any single company in the consolidation. 3. Similar accounts of different companies that are combined in the consolidation may not be entirely comparable. 4. Additional information about companies may be needed for a fair presentation, thus requiring voluminous footnotes. 5. Information is lost any time data sets are aggregated. Subsidiary Financial Statements 0. Creditors, preferred stockholders, and noncontrolling common stockholders of subsidiaries are most interested in the separate financial statements of the subsidiaries in which they have an interest.
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1. Because subsidiaries are legally separate from their parents, the creditors and stockholders of a subsidiary generally have no claim on the parent, and the stockholders of the subsidiary do not share in the profits of the parent. Concepts and Standards 2. Professional guidance is provided in ARB 51, FASB 94, and FASB 160 . 3. Traditional view of control 0. ARB 51 indicates that consolidated financial statements normally are appropriate for a group of companies when one company “has a controlling financial interest in the other companies.” 1. FASB 94 requires consolidation of all majority-owned subsidiaries unless the parent is unable to exercise control. 4.
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Advanced Accounting Ch. 3 -...

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