The case for consolidated financial statements (CFS) presumes that the separate legal entity principle can be...

The case for consolidated financial statements (CFS) presumes that the separate legal entity principle can be ignored. Is this presumption valid, in your view? Explain your position.

Expert Solution

Consolidated Financial statement presume Single Economic Entity concept.

In consolidation we present the financial statements of the whole group as if it were of a single entity and portray the net income and position of assets and liabilities.

This presumption is valid.

The reasons being:

1. Some companies might be formed only to enjoy the undue advantage of taxes etc. without any basic operations, such companies might be exposed due to consolidation.

2. Some entities might be formed just to join the chain of companies borrowing loans and lending them to sister concerns, individually their financial statement shows many numbers but when consolidated, the intercompany holdings and borrowings are eliminated and the actual position of the assets and liabilities can be known by the users of the financial statements and their investors and even by the governmental agencies.

3. Sales among group companies are also eliminated in the consolidated financial statements to show how much the group as a whole has sold to the external market and how much of the profits are earned from external market.

ekkarill92 answered 1 year ago

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