3rd Post Discussion:
Respond to the post below from your fellow classmate. Any opinions, or anything you would like to add to discuss about their post. Must be three substantial paragraphs, and three references.
Consolidation of Financial Statements are like combined accounts of a company and its subsidiaries.
A parent company may operate as a separate company in addition to its subsidiaries. Thus, each of these entities reports its own accounts and operates its own business. However, as the subsidiaries are considered an economic entity, for investors, regulatory shareholders and customers, a consolidated financial statement more fully evaluated the position of the business group.
The benefits that consolidation offers are:
Evaluate the overall health of an entire group of companies by looking at just one company’s position.
Review the financial situation and results of a business group together, giving an expanded view of the operations of a corporation as a whole, if an investor analyzed the individual results of each business in the group, they were not an idea of ??how well the company’s financial health is as a whole.
Allows deviations to be corrected before the group (or a subsidiary) is taken by surprise and creditors begin to evaluate a guarantee of the borrowed capital.
Disadvantages of a consolidated financial statement:
When you have a consolidated base, income, expenses and net income are generated as combined numbers. This can hide any profitability issues with one or more companies.
If one of the companies has a high level of indebtedness in relation to the owners’ equity, that leverage would be hidden in a consolidated statement.
If you have intercompany loans, this will be canceled on consolidation and investors will not have a clear view of the level of intercompany transactions.
Reference:
AccountingTools. 2019 August 15. Consolidated financial statements. https://www.accountingtools.com/articles/what-are-consolidated-financial-statements.html
Investopedia. 2020 Jun 21, 2020. Consolidated Financial Statements. https://www.investopedia.com/terms/c/consolidatedfinancialstatement.asp#:~:text=Consolidated%20financial%20statements%20are%20financial,with%20multiple%20divisions%20or%20subsidiaries.&text=However%2C%20the%20Financial%20Accounting%20Standards,a%20parent%20company%20and%20subsidiaries.
