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16 September, 21:12

What is the best theoretical justification for consolidated financial statements?

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  1. 16 September, 21:15
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    The options are given below:

    A. In form the companies are one entity; in substance they are separate

    B. In form the companies are separate; in substance they are one entity.

    C. In form and substance the companies are one entity

    D. In form and substance the companies are separate

    The correct option is B.

    Explanation:

    Consolidated financial statements refer to the financial statements of an entity that has multiple divisions or subsidiaries. Therefore, companies often use the word consolidated loosely when carrying out financial statement reporting in a manner which refers to the overall reporting of their whole business collectively.

    The Financial Accounting Standards Board defines consolidated financial statement reporting as reporting of an entity which possesses the structure of a parent company and subsidiaries.

    The reason therefore, why the consolidated financial statements is used, is to present, basically for the benefit of the owners, stakeholders, and shareholders of the parent, the results of the financial position of the parent company and all its subsidiaries as if the consolidated group were a single economic entity.

    Hence, though the parent company and its subsidiaries operate separately, they are reported as one entity in the consolidated financial statements.
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