End of Module 7 questions

End of Module 7 questions - Q7-7 When an investing company...

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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). Q7-10 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). References: Easton, P.; Halsey, R. F.; McAnally, M. L.; Hartgraves,A. & Morse, W., (2010), Financial & managerial accounting for MBAs. Canada: Cambridge Business Publishers http://www.ehow.com/info_12018876_reasons-consolidated-financial-statements.html ...
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