Consolidated and combined F/S Flashcards

1
Q

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?

A.
Consolidated financial statements should be prepared for both Star and Sun.

B.
Consolidated financial statements (including the financial information of both corporations) should only be prepared by Star and not by Sun.

C.
After consolidation, the accounts of both Star and Sun should be changed to reflect the consolidated totals for future ease in reporting.

D.
After consolidation, the accounts of both Star and Sun should be combined together into one general-ledger accounting system for future ease in reporting.

A

A company that controls another company must prepare consolidated financial statements. Star owns 100% of Sun and must consolidate the financial statements of the two companies.

FASB ASC 805-10-05-2

EXAMPLE STX MUST PREP CONSOLIDATED F/S

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2
Q

Consolidated financial statements are typically prepared when one company has a controlling financial interest in another, unless:

A.
the subsidiary is a finance company.

B.
the fiscal year-ends of the two companies are more than three months apart.

C.
such control does not rest with the majority owner because the subsidiary is in bankruptcy.

D.
the two companies are in unrelated industries, such as manufacturing and real estate.

A

such control does not rest with the majority owner because the subsidiary is in bankruptcy.

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3
Q

Combined statements may be used to present the results of operations of:

A.
commonly controlled companies.

B.
companies under common management.

C.
both commonly controlled companies and companies under common management.

D.
neither commonly controlled companies nor companies under common management

A

both commonly controlled companies and companies under common management.

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4
Q

On December 31 of the previous and current year, Taft Corporation had 100,000 shares of common stock and 50,000 shares of noncumulative and nonconvertible preferred stock issued and outstanding. Additional information for the current year follows:

Stockholders’ equity at 12/31 $4,500,000
Net income year ended 12/31 1,200,000
Dividend on preferred stock year ended 12/31 300,000
Market price per share of common stock on 12/31 72

The price-earnings ratio on common stock at December 31 was:

A

The price-earnings ratio is P/E = Stock price ÷ EPS (earnings per share).
Net Income-Preferred stock/Weighted Average CS outsta

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5
Q

When a parent-subsidiary relationship exists, consolidated financial statements are prepared in recognition of the accounting concept of:

A.
faithful representation.

B.
materiality.

C.
legal entity.

D.
economic entity.

A

The purpose of consolidated statements is to present…the results of operations and the financial position of a parent and all its subsidiaries essentially as if the consolidated group were a single economic entity.

Answer D ECONOMIC ENTITY

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