Consolidated Financial Statements Flashcards
(9 cards)
What is the difference between Consolidated F/S and Combined F/S?
Consolidated F/S include the the Parent Company’s F/S and the Combined F/S do not. In fact, the Combined F/S include just the entities that are owned by the Parent Company.
What is Goodwill?
Goodwill is the Excess paid over the FV amount of an Asset.
Example:
-Purchased a car for $5,000
-The FV of the Car is $4,050
-Excess paid over the FV = $950
-Goodwill = $950
What is the Equity Method of Accounting?
The Equity Method of Accounting is a method used when an Investor holds/owns 20% - 50% of the investee’s Voting Stock. This means that the Investor has the ability to “exercise significant influence” over the Operating and Financial Policies of the Investee.
When are Consolidated Financial Statements necessary?
Consolidated Financial Statements are necessary when the Investor holds/owns 50% or more of the Investee’s Voting Stock.
How should the Investor treat “cash dividends” declared by the Investee under the Equity Method of Accounting?
The investor should treat this as a “return on investment” and their investment account should be reduced.
How should the Investor treat Investee’s “net income” the Equity Method of Accounting?
The Investor should treat this as an increase in their investment and report it as income in their investment account.
What does it mean when one company has a “Parent” Company?
This means that the entity is 50% or more owned by another company……….. their “Parent.”
What happens to the Stockholder Equity section on the Parent’s Consolidated Balance Sheet when there is an increase in the Investee’s Stockholder Equity?
Nothing…. This is a trick question.
No matter if the Investee’s Stockholder Equity increases or decreases, the Stockholder Equity section of the Parent Company will always be their own Stockholder Equity amount.
Parent Stockholder’s Equity:
$7,000
Investee’s Stockholder’s Equity:
$5,000
Parent’s Consolidated Stockholder’s Equity = $7,000
