Preparing Consolidated Financial Statements and Intra Group Transactions

This memorandum discusses the technicalities of purchasing majority shares of Soletta Ltd and covers topics such as the purpose of preparing consolidated financial statements, group, parent and subsidiary companies, adjustments for intra group transactions and profits realization in inventory transfers within the group.

MEMORANDUM
DATE: 4 September 2018
TO: Jane Penfold
FROM: Accountant
SUBJECT: Presentation to Executive on purchase of majority shares of Soletta Ltd
The memorandum is with respect to the proposal to purchase the majority shares of Soletta Ltd
and the various technicalities to be discussed with the executive team.
a) What is the purpose of preparing consolidated financial statements?
The main reason of preparing consolidated financial statement is to show to the owners and other
stakeholders of an entity, the outcome of the operations and the entity position of the parents and
all its subsidiaries as if the parents and all its subsidiaries were a single entity. (Investopedia,
LLC., 2018)
b) What is a group, a parent and a subsidiary?
A group is a basket of multiple parent and subsidiaries companies that functions as a single
economic entity having common control.
A subsidiary company is a company which has its ownership and controlling power with another
entity, which is referred to as parent company. (Murray, 2017)
c) How many parents can a group have? Justify your answer.
A group can comprises of multiple parent companies, for example, there can be a parent
company which have the controlling power controls the first tier of subsidiary company and
then an ultimate parent company which through its tier first subsidiary manage other subsidiaries
like second and lower subsidiaries.. (Investopedia, LLC, 2018)

d) Why is it necessary to make adjustments for intra group transactions?
The consolidated financial statement are the statement of the group as a single entity and should
include only profits, assets and liabilities that relates to the transactions with outside parties and
hence for internal parties like intra group activity adjustments are required to be made as these
transaction are internal in nature and no outside transaction is involved into it. Intra group
transaction does not reflect an economic activity for gains but are like transactions with own
entities considering group as a single entity. (Course Hero, Inc, 2018)
e) When are profits realised in relation to inventories transfers within the group?
With respect to inventories transfers within the group realization occurs when inventory is sold
to an external party.
Bibliography
Course Hero, Inc. (2018). Why is it necessary to make adjustments for intragroup transaction. Retrieved
September 5, 2018, from www.coursehero.com:
https://www.coursehero.com/file/18010019/SOLUTION-CHAPTER-20/
Investopedia, LLC. (2018). Parent Company. Retrieved September 5, 2018, from www.investopedia.com:
https://www.investopedia.com/terms/p/parentcompany.asp
Investopedia, LLC. (2018). Consolidated Financial Statements. Retrieved September 5, 2018, from
www.investopedia.com: https://www.investopedia.com/terms/c/consolidatedfinancialstatement.asp
Murray, J. (2017, November 30). What Is a Subsidiary Company. Retrieved September 2018, 2018, from
www.thebalancesmb.com: https://www.thebalancesmb.com/what-is-a-subsidiary-company-4098839