A company acquires a subsidiary and will prepare consolidated financial statements for external reporting purposes. For internal reporting purposes, the company has decided to apply the equity method. Why might the company have made this decision? Operating results appearing on the parent's financial records reflect consolidated totals. Consolidation is not required when the parent uses the equity method. GAAP now requires the use of this particular method for internal reporting purposes. It is a relatively easy method to apply.

Question

Kamila Houston

Business

21 November, 16:53

A company acquires a subsidiary and will prepare consolidated financial statements for external reporting purposes. For internal reporting purposes, the company has decided to apply the equity method. Why might the company have made this decision? Operating results appearing on the parent's financial records reflect consolidated totals. Consolidation is not required when the parent uses the equity method. GAAP now requires the use of this particular method for internal reporting purposes. It is a relatively easy method to apply.

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Answers (1)

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Megan Branch · Answer 1

Operating results appearing on the parent's financial records reflect consolidated totals.

Explanation:

When financial statements are prepared then all the entities having a subsidiary are required to prepare a consolidated financial statements.

As for the external requirements the company need to follow the equity method.

As for the internal requirements there are no statutory guidelines, although if the company uses equity method then it is preferable, as the operating parenting company need to show consolidated balances on the balance sheet.

And this method will be in compliance and will be beneficial for internal controls.

Thus, the correct answer is:

Operating results appearing on the parent's financial records reflect consolidated totals.