The Reporting Entity & Consolidated Financial Statement

Consolidated Financial Statements Chapter 3

The Reporting Entity and Consolidated Financial Statements

• Many corporations are composed of numerous separate companies and, in turn, prepare consolidated financial statements.

McGraw-Hill/Irwin

Copyright © 2005 by The McGraw-Hill Companies, Inc. All rights reserved.

3-2

Consolidated Financial Statements

Consolidated Financial Statements

• Consolidation is required when a corporation owns a majority of another corporation’s outstanding common stock.

• Consolidated financial statements present the financial position and results of operations for a parent (controlling entity) and one or more subsidiaries (controlled entities) as if the individual entities actually were a single company or entity.

• The accounting principles applied in the preparation of the consolidated financial statements are the same accounting principles applied in preparing separate-company financial statements.

3-3

3-4

Consolidated Financial Statements

• Two companies are considered to be related companies when one controls the other company. • Consolidated financial statements are generally considered to be more useful than the separate financial statements of the individual companies when the companies are related.

3-5

Consolidated Financial Statements

• Whether the subsidiary is acquired or created, each individual company maintains its own accounting records, but consolidated financial statements are needed to present the companies together as a single economic entity for general-purpose financial reporting.

3-6

1

Benefits

• Consolidated financial statements are presented primarily for the benefit of the shareholders, creditors, and other resource providers of the parent. • Significantly, consolidated financial statements often represent the only means of obtaining a clear picture of the total resources of the combined entity that are under the control of the parent company.

3-7...