Question

Advanced Accounting

You have recently prepared consolidated financial statements (of a parent corporation and subsidiary) where you were required to prepare consolidation (elimination) entries.

In this metacognition assignment, specifically, identify how the financial statements would be affected if the consolidation entries are not recorded?

Specifically, identify which element(s) on each statement is affected and how it is affected (under or overstated).

It is not only important that students think critically and analytically but also has an awareness and understanding of their thinking process (metacognition). Include your reflection below.

1. Income Statement. Which income statement accounts are affected and how?
2. Balance Sheet. Which balance sheet accounts are affected and how?
3. What accounting principle(s) is applied in the consolidation process?
4. When preparing consolidation entries what must be considered in your analysis
5. Reflect on your own problem solving / analysis process.During this course has the way you work through problems changed in any way?What do you believe are your strengths and weaknesses in problem-solving

Answer 1

1.Income Statement:The consolidated financial statements only report income and expense activity from outside of the economic entity. Any revenue earned by the parent company that is an expense of a subsidiary is omitted from the financial statements. This is because the net change in the financial statements is $0. The revenue generated from one legal entity is offset by the expenses in another legal entity. To avoid overinflating revenues, all internal revenues are omitted.

2.Balance Sheet: Certain account receivable balances and account payable balances are eliminated from the consolidated balance sheet. These eliminated amounts relate to the amounts owed to or from parent or subsidiary entities. Like the income statement, this is to reduce the balances reported as the net effect is $0. All cash, receivables, and other assets are reported on the consolidated statements, as well as all liabilities owed to external parties.

3.Accounting principles: Consolidated financial statements must be prepared using the same accounting methods across the parent and subsidiary entities. If relevant, the parent and subsidiaries must all be accounted for using generally accepted accounting principles (GAAP) if the consolidated financial statements are to be in accordance with GAAP. All subsidiary equity accounts, such as common stock or retained earnings, must be eliminated. A non-controlling interest account may be used if the subsidiary is not wholly owned. When preparing the consolidated financial statements, the subsidiary’s balance sheet accounts are readjusted to the current fair market value of the financial assets.

4.What must be considered in analysis:Consolidated financial statements are the combined financial statements of a parent company and its subsidiaries. Consolidated financial statements present an aggregated look at the financial position of a parent company and its subsidiaries, and they provide a picture of the overall health of an entire group of companies as opposed to one company's standalone position.While preparing consolidation entries,the related guidelines for Profit and Loss Account and Balance Sheet accounts need to be followed as mentioned in answers 1 & 2.Also,There are three ways to calculate the ownership interest between companies. Only companies that are owned are included in the consolidated financial statements. Ownership is based upon the total amount of stock owned. If a company owns less than 20% of another company's stock, it may use the cost method of financial reporting. If a company owns more than 20% but less than 50%, the company uses the equity method. Under both methods, consolidated financial statements are not permitted.