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Chapter 3

AN INTRODUCTION TO CONSOLIDATED FINANCIAL STATEMENTS

Chapter Outline

A BUSINESS COMBINATION UNDER GAAP INCLUDES COMBINATIONS IN WHICH ONE OR MORE COMPANIES BECOME SUBSIDIARIES OF A PARENT CORPORATION.

A A corporation that holds a majority interest (over 50%) of the voting stock of another corporation is referred to as the parent company.

B The interest not held by the parent company is referred to as the noncontrolling interest.

C A corporation whose outstanding voting stock is over 50% owned by another corporation is a subsidiary of that corporation.

D GAAP states that the acquisition of additional shares of a subsidiary is recorded by an increase in the investment account and a reduction of the noncontrolling interest, based on the carrying amount of the noncontrolling interest at the additional acquisition date. APIC is adjusted for any difference between the price and the carrying amount.

E The parent company and subsidiary exist as separate legal entities and maintain separate accounting records. However, each reporting period their separate accounting records are combined into one set of consolidated financial statements for reporting the financial position and results of operations of a consolidated reporting entity.

1 Consolidated financial statements are prepared for all the companies under the control of a single management team to reflect a single reporting entity with multiple divisions.

2 The purpose of consolidated financial statements is to present fairly, primarily for the benefit of the owners and creditors of the parent company, the results of operations and the financial position of a parent and all its subsidiaries as if the consolidated group were a single entity.

3 The subsidiary will continue to report the results of its separate operations to its noncontrolling...

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