Question

Why should consolidated financial statements be prepared? Do they exhibit financial strength of goodwill?

Answer 1

Solution:-

Consolidated financial statements are prepared to accurately report the financial performance of a group of entities taken as a whole. This is not done by simply adding all the items in the individual financial statements of each entity in the group. Eliminations are done to zero out any intragroup transactions (upstream, downstream, or across affiliates) which may make the consolidated balances bloated as in the case of a parent company selling goods to its subsidiaries. In this transaction, the parent company's income would have to be eliminated against the subsidiaries' cost. As a result, consolidated financial statements should only show the results

Whenever one business buys another, and pays more than the fair value the excess is termed "goodwill." This has always struck me as an odd term - but I suppose it is easier to attach this odd name, in lieu of using a more descriptive account title like: Excess of Purchase Price Over Fair Value of Identifiable Assets Acquired in a Purchase Business Combination. So, when you see Goodwill in the corporate accounts, you now know what it means. It only arises from the purchase of one business by another. Many companies may have implicit goodwill, but it is not recorded until it arises from an actual acquisition

Perhaps we should consider why someone would be willing to pay such a premium. There are many possible scenarios, but sufficent it to say that many businesses are worth more than their identifiable pieces. A movie rental store, with its business location and established customer base, is perhaps worth more than the movies, display equipment, and check-out stands it holds. A law firm is hopefully worth more than its desks, books, and computers. An oil company is likely far more valuable than its drilling and pumping gear. Consider the value of a brand name that may not be on the books but has instead been established by years of marketing. And, let's not forget that a business combination may eliminate some amount of competition; some businesses will pay a lot to be rid of a competitor.

The Consolidated Balance Sheet

No matter how goodwill arises, the accountant's challenge is to measure and report it in the consolidated statements - along with all the other assets and liabilities of the parent and subsidiary