Hoyle_sg02 - Updated Sixth Edition Chapter 2 Consolidation of Financial Information Chapter Outline I Expansion through Corporate Takeovers The

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Updated Sixth Edition Chapter 2 Consolidation of Financial Information Chapter Outline I. Expansion through Corporate Takeovers The combining of two or more businesses into a single entity under common management and ownership control is a popular economic event. A. Business combinations can be part of an overall managerial strategy to maximize shareholder value. B. Many business combinations share one or more of the following characteristics that potentially enhance profitability: 1. Vertical integration of one firm’s output and another firm’s distribution or further processing. 2. Cost savings through elimination of duplicate facilities and staff. 3. Quick entry for new and existing products into domestic and foreign markets. 4. Economies of scale allowing greater efficiency and negotiating power. 5. The ability to access financing at more attractive rates. As firms grow in size, negotiating power with financial institutions can grow also. 6. Diversification of business risk. C. The principal motivations for many business combinations can be traced to an increasingly competitive environment. II. The Consolidation Process A. A business combination occurs when two or more companies join together under common control. 1. A business combination results when in the creation of a single economic entity. 2. The consolidation of financial information into a single set of financial records is required whenever one of the companies in the group “directly or indirectly has a controlling financial interest in the other enterprise.” 16 Advanced Accounting – Updated 6/e
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3. In many combinations, the consolidation process is carried out only at the date of the business combination to bring together all accounts into a single set of financial records, and all but one of the companies is dissolved as a legal corporation. 4. In other combinations, the consolidation process repeats whenever financial statements must be prepared, and the companies retain their legal identities as separate entities and continue to maintain their own individual accounting systems. a. This condition is described as “ substance over form .” In other words, while there are at least two separate legal entities (in form), we must consolidate their financial statement information because they are in effect one entity (in substance). B. In order to explain the process of preparing consolidated financial statements for a business combination, we address the following three questions: 1. How is a business combination formed? 2. What constitutes a controlling financial interest? 3. How is the consolidation process carried out? C. Existing U.S. accounting pronouncements do not actually define the meaning of a controlling financial interest . 1.
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This note was uploaded on 03/08/2012 for the course ECON 155 taught by Professor Klein during the Spring '12 term at University of California, Berkeley.

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Hoyle_sg02 - Updated Sixth Edition Chapter 2 Consolidation of Financial Information Chapter Outline I Expansion through Corporate Takeovers The

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