Acct20073 Company Accounting For Economic Assessment Answers
Questions:
(a)What is the purpose of preparing consolidated financial statements?
(b)What is a group, a parent and a subsidiary?
(c)How many parents can a group have? Justify your answer.
(d)Why is it necessary to make adjustments for intragroup transactions?
(e)When are profits realised in relation to inventories transfers within the group?
Answer:
Part A
The main purpose of the consolidated financial statements is to showcase, first and foremost for parent company’s owner as well as creditor benefits, further the outcomes held from operations and the parent company’s financial positions and all subsidiary as would be the case if the consolidated group is considered as sole economic entity(Gitman, Juchau & Flanagan, 2015).
Part B
A corporate group is a set of a parent as well as subsidiary companies that work altogether as an economic business entity by a same level of control. A parent company is stated as a company that possesses a controlling interest in other company, handing over the operations control. A subsidiary company is stated as a company whose ownership or control is in the hands of another company, named as parent company (Song, 2015).
Part C
A group can have only 1 parent because parent means the majority of shareholdings. It is because the parent company holds the majority of the shareholding. Therefore, such right cannot be shared by more than one entity.
Part D
The consolidated financial statements are considered as the group’s statements, and economic business entity inclusive of the parent with all its subsidiaries. Further, the consolidated financial statement then can merely include revenues, assets as well as liabilities, which are associated with the outer parties in the group. To this note, the adjustment should be made for the transactions of intragroup, because they are interior to the economic business entity, and the same do not disclose the transactional effects with the outer parties (Gul, Hsu & Liu, 2017). This is stable with the consolidation theory of entity, stating them as the new assets of parents and subsidiaries. Thus, the transactions held among such parties should be fully adjusted, because both of the parties are in the same economic business entity,
Part E
Profit Realisation takes place on the engagement of an outer business entity, specifically in a situation where the inventory is put on sale to a business entity which is not the group’s member in general (Beaver, Cascino, Correia & McNichols, 2017).
References
Beaver, W. H., Cascino, S., Correia, M. M., & McNichols, M. F. (2017). Group affiliation and default prediction. Routledge.
Gitman, L. J., Juchau, R., & Flanagan, J. (2015). Principles of managerial finance. Pearson Higher Education AU.
Gul, F. A., Hsu, A. W. H., & Liu, S. H. T. (2017). Parent-subsidiary investment layers and audit fees. Journal of Accounting, Auditing & Finance, 0148558X17696763.
Song, S. (2015). Exchange rate challenges, flexible intra-firm adjustments, and subsidiary longevity. Journal of World Business, 50(1), 36-45.
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