Advanced Accounting: Consolidated Financial Statements Chp 4
Cash flow hedges
Designated to hedge the exposure to potential changes in the anticipated cash flows, either into our out of the company, for (a) a recognized asset or liability such as future interest payments on variable-interest debt or (b) a forecasted ash transaction such as a forecasted purchase or sale.
Fair value hedges
Designated to hedge the exposure to potential changes in the fair value of (a) a recognized asset or liability such as available-for-sale investments or (b) an unrecognized firm commitment for which a binding agreement exists, such as to buy or sell inventory.
Managing an exposed foreign currency position
Entering into a foreign currency forward contract balances a foreign exchange payable with a receivable in the same foreign currency, thus offsetting the risk of foreign exchange fluctuations.
Consolidated net income
Equal to the parent's income from its own operations, excluding any investment income from consolidated subsidiaries, pus the net income from each of the consolidated subsidiaries.
Consolidated net income
Equal to the parent's income from its own operations, excluding any investment income from the consolidated subsidiaries, plus the net income from each of the consolidated subsidiaries, adjusted for any differential write-off.
Foreign currency exchange rate
Established daily by foreign exchanged brokers who serve as agents for individuals or countries wishing to deal in foreign currencies.
Pooling-of-interests method
FASB eliminated this method in 2001, leaving only a single method, purchase accounting.
Combined financial statements
Financial statements that include a group of related companies without including the parent company or other owner.
Entity theory
Focuses on the firm as a separate economic entity rather than on the ownership rights of the shareholders.
Foreign currency transactions
Give rise to a transfer of foreign currency or the recording of receivables or payables that are denominated in a foreign currency.
Foreign currency hedges
Hedges in which the hedged item is denominated in a foreign currency.
Pro rata consolidation
In which the parent company consolidates only its proportionate share of a less-than-wholly-owned subsidiary's assets, liabilities, revenues, and expenses.
Other Comprehensive Income (OCI)
Includes all revenues, expenses, gains, and losses that under GAAP are excluded from net income.
Tender offer
Invites shareholders of the other company to exchange their shares for securities or assets of the acquiring company.
Direct intercompany debt transfer
Involves a loan from one affiliate to another without the participation of an unrelated party.
Consolidation
Involves combining for financial reporting the individual assets, liabilities, revenues, and expenses of two or more related companies as if they were part of a single company.
Indirect intercompany debt transfer
Involves the issuance of debt to an unrelated party and the subsequent purchase of the debt instrument by an affiliate of the issuer.
Corporate joint venture
Is a corporation owned and operated by a small group of businesses, none of which owns a majority of the joint venture's common stock.
Average rate
Is usually a simple average for a period of time and is usually the exchange rate used to measure revenues and expenses.
Equity accrual
Normally is made as an adjusting entry at the end of a period. If the investee reports a loss for the period, the investor recognizes its share of the loss and reduces the carrying amount of the investment by that amount.
Minority interest
Now known as the non-controlling interest.
Indirect control
Occurs when a company's common stock is owned by one or more other companies that are all under common control. Also known as pyramiding.
Business combination
Occurs when an acquirer obtains control of one or more businesses.
Stock acquisition
Occurs when one company acquires the voting shares of another company and the two companies continue to operate as separate, but related, legal entities.
Spin-off
Occurs when the ownership of a newly created or existing subsidiary is distributed to the parent's stockholders without the stockholders surrendering any of their stock in the parent company.
Split-off
Occurs when the subsidiary's shares are exchanged for shares of the parent, thereby leading to a reduction in the parent company's outstanding shares.
Other beneficial interest
One company may have a beneficial interest in another entity even without a direct ownership interest.
Consolidated financial statements
Portrays related companies as if they were actually a single company.
Consolidation worksheet
Provides a mechanism for efficiently combining the accounts of the separate companies involved in the consolidation and for adjusting the combined balances to the amounts that would be reported if all consolidating companies were actually a single company.
Parent company theory
Recognizes that the parent has the ability to effectively control all of the assets and liabilities of a majority-owned subsidiary, not just a proportionate share, even though the parent does not actually own the subsidiary's assets or have any obligation for its liabilities.
Effective control
Reflects the ability to direct the policies of another entity even though majority ownership is lacking.
Goodwill
Related to the future economic benefits associated with other assets that are not separately identified and recognized.
Time value of a derivative
Related to the value assigned to the opportunity to hold the derivative open for a period of time.
Control
Relates to the ability to direct policies and management. Traditionally has been gained by acquiring a majority of the company's common stock.
Push-down accounting
Revaluing the assets and liabilities of the subsidiary directly on its books.
Accumulated Other Comprehensive Income (AOCI)
Temporary accounts that are closed at the end of each period. Instead of being closed to Retained Earnings as revenue and expense accounts are, OCI are closed to this special stockholders' equity account.
Consolidated retained earnings
That portion of the consolidated enterprise's undistributed earnings accruing to the parent company shareholders.
Liquidated
The acquired company's assets and liabilities are transferred to the acquiring company and the acquired company is dissolved.
Acquisition method
The acquirer recognizes all assets acquired and liabilities assumed in a business combination and measures them at their acquisition-date fair values.
Foreign currency transaction gain or loss
The adjustment in equivalent U.S. dollar values is this for the entity when exchange rates have changed.
Hedging unrecognized foreign currency firm commitments
The company can separate the commitment into its financial instrument (the obligation to pay) and non-financial asset (the right to receive inventory) aspects.
Reporting currency
The company prepared its financial statements in this currency.
Differential
The difference between the fair value of the consideration given and the book value of the acquiree's net identifiable assets.
Spread
The difference between the forward rate and the spot rate on a given date.
Current rate
The exchange rate at the end of the trading day on the balance sheet date.
Spot rate
The exchange rate for immediate delivery of currencies.
Bargain purchase
The fair value of any non-controlling interest in the acquiree may be less than the fair value of the acquiree's net identifiable assets.
Markup
The gross profit on intercompany sales is often referred to simply as this.
Local currency
The majority of a business's cash transactions take place in this of the country in which the entity operates.
Notional amount
The number of currency units, shares, bushels, pounds, or other units specified in the financial instrument. Typically expressed in U.S. dollars.
Speculate with a forward exchange contract
A U.S. company expects that the dollar will strengthen against the Swiss franc, that is, the direct exchange rate will decrease. The U.S. company might sell francs for future delivery, expecting to be able to purchase them at a lower price at the time of delivery.
Bargain purchase
A business combination in which (1) the sum of the acquisition-date fair values of the consideration given, any equity interest already held by the acquirer, and any non-controlling interest is less than (2) the amounts at which the identifiable net assets must be valued at the acquisition date. This is a gain attributable to the acquirer.
Statutory consolidation
A business combination in which both combining companies are dissolved and the assets and liabilities of both companies are transferred to a newly created corporation.
Controlling ownership
A business combination in which the acquired company remains as a separate legal entity with a majority of its common stock owned by the purchasing company leads to a parent-subsidiary relationship.
Merger
A business combination in which the acquired company's assets and liabilities are combined with those of the acquiring company.
Primary beneficiary
A company that has the ability to make decisions significantly affecting the results of another entity's activities or is expected to receive a majority of the other entity's profits and losses.
Functional currency
A company uses this as its primary currency for performing its major financial and operating functions.
Subsidiary
A corporation that another corporation, referred to as a parent company, controls, usually through majority ownership of its common stock.
Parent company
A corporation that controls another corporation, usually through majority ownership of its common stock.
Derivative
A financial instrument or other contract whose value is "derived from some other item that has a variable value over time.
Special-purpose entity
A financing vehicle that is not a substantive operating entity, usually one created for a single specified purpose. SPEs may be in the form of a corporation, trust, or partnership.
Parent-subsidiary relationship
A parent company is one that controls another company, referred to as a subsidiary, usually through majority ownership of common stock.
Unconsolidated subsidiary
A subsidiary that is not consolidated with the parent and is shown as an investment on the parent's balance sheet.
Statutory merger
A type of business combination in which only one of the combining companies survives and the other loses its separate identity.
Constructive retirement
Acquisition of an affiliate's bonds by another company within the consolidated entity. Although the bonds are not actually not retired, they are treated as if they were retired in preparing consolidated financial statements.
Forward exchange contract
Active dealer markets in this are maintained for companies wishing to either receive or deliver major international currencies.
Liquidating dividends
All dividends declared by the investee in excess of its earnings since acquisition by the investor are viewed by the investor as...
Non-controlling interest
Also known as minority interest.
One-line consolidation
Although the equity method has been viewed as this, the amount of detail reported is considerably different under the equity method than with consolidation.
Affiliate
An affiliated company.
Goodwill
An asset representing the future economic benefits arising from other assets acquired in a business combination that are not individually identified and separately recognized.
Primary beneficiary
An enterprise that will absorbed a majority of the VIE's expected losses, receive a majority of the VIE's expected residual returns, or both, is called this.
Markup on sales
Another term for gross profit percentage.
Underlying
Any financial or physical variable that has observable or objectively verifiable changes.
Non-controlling ownership
The purchase of a less-than-majority interest in another corporation does not usually result in a business combination or controlling situation.
Markup on cost
The ratio of gross profit divided by COGS.
Transfer price
The selling price of the inventory is sometimes referred to as this.
Current rate
The spot rate on the entity's balance sheet date.
Comprehensive Income
The sum of Net income and other comprehensive income.
Differential
The total difference at the acquisition date between the fair value of the consideration exchanged and the book value of the net identifiable assets acquired.
Non-controlling interest
The total of the shares of an acquired company not held by the controlling shareholder.
Intrinsic value of a derivative
The value related to the changes in value of the underlying item.
Intercorporate transfers
Transactions between related companies. Often critical to the operations of the overall consolidated entity.
Direct control
Typically occurs when one company owns a majority of another company's common stock.
Unrealized intercompany profit
Unconfirmed profit from an intercompany transfer.
Equity method
Used for external reporting when the investor exercises significant influence over the operating and financial policies of the investee and consolidation is not appropriate.
Cost method
Used for reporting investments in equity securities when both consolidation and equity-method reporting are inappropriate.
Elimination entries
Used in consolidation worksheet to adjust the totals of the individual account balances of the separate consolidating companies to reflect the amounts that would appear if the legally separate companies were actually a single company.
Measurement period
Used to acquire necessary information. Ends once the acquirer obtains the necessary information about the facts as of the acquisition date. but may not exceed one year beyond the acquisition date.
Proprietary theory
Views the firm as an extension of its owners. The firm's assets, liabilities, revenues, and expenses are viewed as those of the owners themselves.
Variable Interest Entity (VIE)
What the FASB refers to SPEs as.
Downstream sale
When a parent company sells inventory to a subsidiary. Any gain or loss on the transfer accrues to the parent company's stockholders.
Downstream sale
When a parent sells to its subsidiary. Any gain or loss accrues to the parent company's stockholders.
Upstream sale
When a subsidiary sells inventory to its parent. Any gain or loss accrues to the subsidiary's stockholders.
Upstream sale
When a subsidiary sells to its parent. Any gain or loss accrues to the subsidiary's stockholders.
Parent
When one company controls another.
Subsidiary
When one company is controlled by another.
Special-Purpose Entities (SPEs)
Corporations, trusts, or partnerships created for a single specified purpose. Usually have no substantive operations and are used only for financing purposes.
Financial instrument
Cash, evidence of ownership, or a contract that both (1) imposes on one entity a contractual obligation to deliver cash or another instrument and (2) conveys to the second entity that contractual right to receive cash or another _________ __________.
Minority interest
Control can be achieved without majority ownership but a comprehensive consolidation policy has yet to be achieved by the FASB.
