Consolidated Financial Statements: Purpose, Concepts, and Adjustments

Running head: COMPANY ACCOUNTING (MEMORANDUM) 1
Company Accounting (Memorandum)
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Professor
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COMPANY ACCOUNTING (MEMORANDUM) 2
MEMORANDUM
DATE: 4th September 2018
TO: The Executive Team, Palvidia Ltd.
FROM: Jane Penfold
SUBJECT: Consolidated Financial Statements
Introduction
Consolidated financial statements comprise of financial statements of a group of
companies presented as belonging to one economic entity (Bozec, 2008). This memorandum
mainly discusses the purpose of preparing these statements, and explains key related concepts.
The Purpose of Preparing Consolidated Financial Statements
According to Financial Accounting Standards Board (FASB), consolidated financial
statements are prepared purposely for simplifying how investors, vendors, creditors and other
key stakeholders understand and analyze the financial condition of a group of companies. These
statements are very essential in helping them determine how secure the company is, with regard
to its ability to settle its obligations as it continues operating profitably. It is much difficult for
financial analysts and investors to collect financial reports for parent company as well as its
multiple subsidiaries with an aim to acquire insights regarding to the group’s financial health.
For this purpose, it is a critical requirement for parent companies to make a consolidated report
on their finances (Cotter, 2012).
What is a Group, a Parent and a Subsidiary?
A subsidiary refers to any entity that is owned or controlled either directly or indirectly
by another entity. A parent company is an entity which owns or has a controlling interest in
another entity, known as the subsidiary, such that it controls the primary operations of the latter.
A group company is defined by the Companies Act as a collection of two or more parent and
subsidiary entities, which are operated as a single unit of economic entity under common control
(Cotter, 2012).
How many Parents Can a Group Have?
A Group can only have one parent company. For existence of a parent-subsidiary
relationship, the parent must have controlling interests in every subsidiary within the group.
This means that the parent company must either own the subsidiaries wholly or acquire a