Account Case
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USEFULNESS OF CONSOLIDATED FINANCIAL STATEMENTS TO USERS OF FINANCIAL STATEMENTS AS OPPOSED TO THE PARENT COMPANYS SEPARATE FINACIAL STATEMENTS:
Company overview:
It considers the fact that a complete overview of the parent company and all of its subsidiaries appears in one set of reports. These financial statements provide a financial overview of all companies owned by the parents. Therefore the financial statement user determines the financial health of the entire organization by the reviewing the consolidated financial statements.
Considerations:
Without consolidated financial statements the process of the evaluating a company for the investment or financing purposes would be a long complex affair that might altogether miss important assets or liabilities. For example many arguments that occur between company managements, accounting and auditing at year ended involve how the consolidation of reports should be done in order to give the most accurate picture of the companys financial health. It is the auditors job to make sure consolidation of accounting reports accurately reflects the true condition of the company.
REASONS TO USE EQUITY METHODS:
OPERATIONAL SUSTAINABILITY:
The equity basis of accounting enables companies to find ways to supplement operating income and diversify their revenue base a smart move, especially when dealing with a modern economy replete with fluctuations, some of which may be prolonged and significantly adverse. OS help corporate management a segment generates consistence income over time.
COST AWARENESS:
External investments whether they be long or short term offer a glimpse of what it would be like if a coy had to rely only on its operating income
CRITISMS OS EQUITY METHOD
The 20 to 50 percent rule may appear to be an arbitrarily chosen boundary renge established merely to provide a consistent method of reporting for investments. However the essential criterion is still the ability to significantly influence the investee rather than 20 to 50 owership. If the absence ofthis ability is proven the equity method should not be applies regardless of the percentage of the shares held.
For examples the equity method is not appropriate for investments that demonstrate any of the following characteristics regardless of the investors degree of ownership:
An agreement exists btn investor and investee by which the investor surrenders significant rights as a shareholders
A concentration of ownership operates the investee without regard for the views of the investor