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10 Cards in this Set
- Front
- Back
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What is the presumption about consolidated financial statements? |
Consolidated FSs are more meaningful than parent company FSs and/or parent company FSs together with separate subsidiary statements. A. Consolidated FSs (including segment reporting) are necessary for fair presentation. B. The equity method is not a valid substitute for consolidation. |
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What do consolidated financial statements ignore? |
They ignore important legal relationships and emphasize economic substance over form. Consolidated FSs are an economic truth but a legal fiction.
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Limitations of consolidated financial statements: |
A. Noncontrolling interest shareholders, creditors, & bond holders remain uninformed regarding the separate financial statements. B. Weak performance of one company may be offset by the strong performance of another. C. Ratio analysis of consolidated data unreliable. D. Retained earnings for parent shareholders are not segregated nor otherwise indicated. |
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Criteria of when to and when not to consolidate: |
A. Consolidate ALL majority owned subsidiaries (> 50% of the voting interest is owned by parent company). B. DO NOT consolidate if control not w/ owner C. Companies w/ different year ends can be consolidated. D. In vertical chain, where parent co. owns >50% of subsidiary & subsidiary owns > 50% of a 3rd co., consolidate the 3rd co. into subsidiary co. & consolidate the subsidiary co. into parent co. |
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What is the difference between how GAAP & IFRS report significant transactions during the gap period? |
Under GAAP, significant transactions during the gap period require disclosure. Under IFRS, the subsidiary financial statements must be adjusted for significant transactions during the gap period. |
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Degree of Control: |
A. Cost method/Do Not consolidate = No Significant Influence (typically < 20%) B. Equity method/Do Not consolidate = significant influence but 50% or less ownership (typically 20%-50%) C. Consolidate = Control (>50% ownership) |
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What is consolidation? |
A combination of the financial statements of two or more entities into a single set of financial statements representing a single economic unit. |
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Consolidated financial statements are typically prepared when one company has a controlling financial interest in another unless: |
The subsidiary is in bankruptcy. The exceptions to not consolidating are when the subsidiary is in legal reorganization or bankruptcy and/or the subsidiary operates under severe foreign currency exchange restrictions, controls, or other governmentally imposed uncertainties so severe that they cast significant doubt on the parent's ability to control the subsidiary. |
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When a parent-subsidiary relationship exists, consolidated financial statements are prepared in recognition of the accounting concept of: a. Reliability. b. Economic entity. c. Legal entity. d. Materiality. |
Economic entity. |
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Sun Co. is a wholly-owned subsidiary of Star Co. Both companies have separate general ledgers, and prepare separate financial statements. Sun requires stand-alone financial statements. Which of the following statements is correct? |
Consolidated financial statements should only be prepared by Star and not by Sun. |
