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What is the justification for preparing consolidated financial statements when, in fact, it is apparent that...

What is the justification for preparing consolidated financial statements when, in fact, it is apparent that the consolidated group is not a legal entity?

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Expert Solution

Although the consolidated group is not a legal entity, still consolidated financial statements are prepared because an analysis of the same allows us to determine the overall position of an entire group of companies, as compared to a company's stand alone position.

It can happen that the parent company is performing financially well, but a few of its subsidiaries are not doing so well. Consolidation would help to provide a better understanding of the same. Also, there might be a few entries/transactions which take place amongst such companies. The impact of such transfers/ any internal profit realised is also eliminated in the consolidated statements.

Although the consolidated group is not a legal entity, the purpose of preparing such consolidated statements is to provide the stakeholders with a single aggregated view of how the group as a whole is performing, as if the whole group was a single entity. This enhances the decision making power of all the investors and stakeholders.

ekkarill92 answered 2 years ago
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