Introduction to Consolidated Financial Statements

Sun Co. is a wholly owned subsidiary of Star Co. Both companies have separate general ledgers and prepare separate financial statements. Sun requires stand-alone financial statements. Which of the following statements is correct? -Consolidated financial statements should be prepared for both Star and Sun. -Consolidated financial statements should only be prepared by Star and not by Sun. -After consolidation, the accounts of both Star and Sun should be changed to reflect the consolidated totals for future ease in reporting. -After consolidation, the accounts of both Star and Sun should be combined together into one general ledger accounting system for future ease in reporting.

-Consolidated financial statements should only be prepared by Star and not by Sun. Consolidated statements should be prepared by Star, the parent, and not by Sun, the subsidiary. Star has an investment in and control of Sun, which is the basis for preparing consolidated statements; Sun does not have an investment in, or control of, Star. Thus, there is no basis for Sun to prepare consolidated statements.

Which of the following information that exists at the date of an acquisition will be needed to carry out the consolidating process? I. Book values of a subsidiary's assets and liabilities. II. Fair values of a subsidiary's assets and liabilities. III. Parent's cost of its investment in the subsidiary. I, II, and III. I and II, only. II and III, only. III only.

I, II, and III. In order to prepare consolidated financial statements, the parent needs the book values and fair values of a subsidiary's assets and liabilities at the date of the business combination as well as the cost of its investment in the subsidiary.

Which of the following statements, if any, concerning the preparation of consolidated financial statements is/are correct? I. The consolidating process is carried out on the books of the parent entity. II. The consolidated financial statements report two or more legal entities as though they are a single economic entity. I only. II only. Both I and II. Neither I nor II.

II only. The consolidated financial statements report two or more legal entities (a parent and its subsidiary/ies) as though they are a single economic entity. Because the entities are under the common economic control of the parent's shareholders, GAAP requires that consolidated statements be the primary form of financial statement disclosure.

The results of the consolidating process are recorded in the books of the: Parent-Subsidiary Yes-Yes Yes-No No-Yes No-No

No-No The consolidating process takes place on worksheets and schedules, and the results are presented in the form of consolidated financial statements. Some of the worksheet and schedule data is carried forward from period end to period end to facilitate the recurring consolidating process.

Under GAAP, which of the following can be issued as the primary form of public financial statement disclosure for a parent and its subsidiaries? Parent only Statement Separate Parent and Subsidiary Statements Consolidated Statements Yes-Yes-Yes Yes-No-No No-Yes-Yes No-No-Yes

No-No-Yes Under GAAP, only consolidated financial statements may be issued as the primary form of public disclosure for a parent and its subsidiaries. Parent only statements and separate parent and subsidiary statements may not be issued in lieu of consolidated financial statements.

Which one of the following kinds of eliminations, if any, will be required in every consolidating process? Intercompany Receivables/Payables Intercompany Investment Intercompany Revenues/Expenses Yes-Yes-Yes Yes-No-Yes No-Yes-No Yes-Yes-No

No-Yes-No An intercompany investment elimination will be required in every consolidating process (to eliminate the parent's investment against the subsidiary's shareholders' equity). Intercompany receivables/payables and intercompany revenues/expenses eliminations will not be required in every consolidating process. Those kinds of eliminations will be required only if the affiliated companies have engaged in intercompany transactions that resulted in such balances.

Aceco has significant investments in three separate entities. These investments are: 1. 40% ownership of the voting stock of Kapco. 2. 60% ownership of the voting stock of Placo. 3. 100% ownership of the voting stock of Simco Which of Aceco's investments would be consolidated with Aceco in its consolidated financial statements? Simco only. Placo and Simco. Kapco, Placo, and Simco. Kapco only.

Placo and Simco. Since Aceco owns controlling interest in Placo (60%) and in Simco (100%), each would be consolidated with Aceco. Kapco would not be consolidated, because Aceco does not have controlling interest in Kapco. In Aceco's consolidated financial statements, Kapco would be shown as an investment.

The choice of methods that a parent uses on its books to account for its investment in a subsidiary will affect the: Consolidating Process-Consolidated Financial Statements Yes-Yes Yes-No No-Yes No-No

Yes-No While the method a parent uses on its books to account for its investment in a subsidiary will affect the consolidating process, the choice of methods will not affect the final consolidated financial statements. The final consolidated financial statements will be the same regardless of the method used by the parent on its books; only the details of the process of developing those statements will be different. The primary difference will be in the nature of the investment eliminating entry on the worksheet.

Combined statements may be used to present the results of operations of Unconsolidated Subsidiaries-Companies under common management Yes-Yes Yes-No No-Yes No-No

Yes-Yes Combined statements may be used to present the financial position and the results of operations of a group of unconsolidated subsidiaries or companies under common management.

Which one of the following methods, if any, may a parent use on its books to carry an investment in a subsidiary that it will consolidate? Cost Method-Equity Method Yes-Yes Yes-No No-Yes No-No

Yes-Yes A parent may use the cost method, the equity method, or any other method on its books to carry an investment in a subsidiary that it will consolidate. The method that is used on its books will affect the consolidating process, but the final consolidated financial statements will be the same regardless of the method the parent uses on its books.

Consolidated financial statements can be prepared for a business combination that was accounted for using which of the following accounting methods? Acquisition Method-Pooling of Interests Method Yes-Yes Yes-No No-Yes No-No

Yes-Yes Consolidated statements can be prepared when a business combination was accounted for using either the acquisition method or the pooling of interests method. Although the pooling of interests method can no longer be used (since June 30, 2001) to account for new business combinations, business combinations carried out under the pooling of interests method prior to that time still require the preparation of consolidated financial statements.