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Unformatted text preview: Q7-7
When an investing company has gained ownership over more than 50% of the
outstanding voting stock of the investee company, it is said that the investing company has
control and is a parent company to the investee. In these cases GAAP requires consolidation of
financial statements issued to the public (Easton, Halsey, McAnally, Hartgraves, & Morse,
2010). One of the main purposes of consolidated financial statements is to provide for a more
efficient analysis. Instead of examining individual statements for all the subsidiary companies,
stockholders can determine the financial health of the network of companies from examining a
single financial statement (http://www.ehow.com/info_12018876_reasons-consolidatedfinancial-statements.html).
While a single consolidated financial statement presents a financial picture of an entire
set of companies under control of a parent company, Easton et al, states that it still presents
certain limitations we should be aware of. For example since the parent company can only
receive cash from its subsidiaries via dividend payments a consolidated income does not mean
that any or all of the subsidiaries income has been received as cash. The subsidiaries on the other
hand might not have access to the consolidated cash, therefore a subsidiary could be
experiencing cash flow problems even if the consolidated statement shows a strong cash flow
Easton, Halsey, McAnally, Hartgraves, & Morse, 2010).
Easton, P.; Halsey, R. F.; McAnally, M. L.; Hartgraves,A. & Morse, W., (2010), Financial
& managerial accounting for MBAs. Canada: Cambridge Business Publishers
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- Spring '09