Please help me understand and make sure that I am on the right track in answering the following questions: 1) Why is it important to consolidate financial statements? 2) When should financial statements be consolidated? Discuss the pros and cons of consolidating financial statements. Include limitations. if any.
Advanced Financial Accounting-
Please help me understand and make sure that I am on the right track in answering the following questions: 1) Why is it important to consolidate financial statements?
It is important to consolidate financial statements to get an accurate representation of the operations of the group. The holding company and its subsidiaries form an economic entity. What the consolidated statements give you is an overall financial position of the economic entity. For instance, the revenues on the consolidated income state will give the revenues that the entity earned from outside customers. This is important because in preparing the consolidated income statement the goods that are sold by the holding company to the subsidiary or visa versa are eliminated. In consolidated statements artificial inflation of revenues is removed. Similarly, the income statement reports all expenses incurred by the group with the outside world. This same benefit is available in case of consolidated balance sheet. All the amounts that the holding company owes its subsidiaries and visa versa or receivables within the entity are eliminated. In the balance sheet we ...
Importance of consolidating financial statements is discussed in great detail in this solution.