equity_12a - CHAPTER 12 SUPPLEMENT A: PREPARING...

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C HAPTER 12 S UPPLEMENT A: P REPARING C ONSOLIDATED S TATEMENTS What Are Consolidated Statements? Any corporate acquisition involves two companies. The parent company is the company that gains control over the other company. The subsidiary company is the company that the parent acquires. When a company acquires another and both companies continue their separate legal existence, consolidated financial statements must be presented. These statements combine the operations of two or more companies into a single set of statements. Basically, consolidated statements can be thought of as the adding together of the separate financial statements for two or more companies to make it appear as if a single company exists . Thus, the cash accounts for each company are added as are the inventory accounts, land accounts, and others. The notes to Washington Post’s 2008 annual report provide the following information: Notes to Consolidated Financial Statements B. Summary Of Significant Accounting Policies Basis of Presentation and Principles of Consolidation — The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles (“GAAP”) in the United States and include the assets, liabilities, results of operations and cash flows of the Company and its majority-owned and controlled subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Remember that consolidated statements make it appear as though a single company exists when  in fact there are two or more separate legal entities.  Intercompany items do not exist for a single  corporation. For example, a debt owed by Washington Post (the parent) to its newsprint subsidiary is  not reported on a consolidated statement because a company cannot owe itself money.  Recording Acquisition of a Controlling Interest By offering cash or shares of its stock or a combination of the two to a target company’s shareholders, one company can acquire control of another. When the target company’s shareholders accept the offer and the exchange is made, the parent company records the investment in its accounts at the acquisition cost using the purchase method. When both companies maintain their separate legal identities after the acquisition, we say that a parent-subsidiary relationship exists. Since both companies continue to exist, both companies’ accounting systems continue to record their respective transactions. Let’s assume that, on January 1, 2010, Washington Post (the parent) paid $100 (dollars in millions) cash to buy all of the stock of INews Company (the hypothetical subsidiary). 1
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equity_12a - CHAPTER 12 SUPPLEMENT A: PREPARING...

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