Financial And Corporate Accounting

Question: Describe about the Financial And Corporate Accounting for A Case Of Consolidated Statement Analysis? Answer: Introduction The essay focuses on the advantages of consolidated financial statements and their ability to save the organizations from forthcoming losses. The essay will thus explore the need for preparing consolidated financial statements and focus on the disadvantages that a company may face due to the showcase of the financial position through the consolidated financial statements. The essay will also focus on the limitations of consolidated statements from the prospective of the investors and the shareholders. Finally, with the help of relevant academic references the essay will try to assess the truth of the title. Discussion In the present context all large-scale organizations are composed of several separate entities hence as per the FASB 94, these companies are required to prepare the consolidated financial statements which presents the presents the financial position and result of operations of the parent company and also the financial position of the subsidiary company. The primary reason for the presentation of consolidated financial statements is to make the shareholders and creditors aware of the financial position of the parent as well as the subsidiary company. As per the norms of IAS 27, the needs for the preparation of consolidated statements are necessary only if the organization has a subsidiary company. It is difficult for the investors to gather all necessary financial information about the parent company and the subsidiary company hence a combine financial report will help the investors to get a comparable and clear data on the financial position of the company and its subsidiary. Crstea (2014) opined that in the public sector companies previously cash basis of accounting was used. However, in order to measure the efficiency of the public sector management the accrual basis of accounting was introduced (Tudor and Mutiu, 2006). Thus, countries adopting accrual basis of accounting started adopting the preparation of consolidated financial statements. Crstea (2014) suggested that the preparation of consolidated statements by the public sectors have helped them to provide a complex and overall view of the financial position of the whole public sector entity which was not possible from the individual financial report prospective. In addition to the benefits of the consolidated statement in Public sectors, the private companies are relying highly on the generation of consolidated statements due to several ethical and unethical advantages. Notes (2012) firstly, the consolidated statements provide a complete overview of the parent and subsidiary company. Secondly, the organizations are able the reduce the amount of paperwork and labor by preparing one combined report instead of preparing individual reports. Thirdly, the reports are presented in a simplified manner so that it is easier for the stakeholders and the investors to assess the current financial position. Moreover, these statements give the organizations an opportunity to balance the loss and revenues. For instance if the income statement of the parent company shows low revenue in a particular financial period then the loss may be compensated by the growth in the revenue of the subsidiary company thereby by making the overall financial position of the c ompany sound and reliable. However, Grossi and Tagesson (2008) argued that the statements do not always provide the clear and accurate picture of the financial position because the statements thus provided by the organizations shows the details of the parent company and no individual accounting reports of the subsidiaries are maintained. Cunningham and Harris (2006) opined that this unethical advantage of the consolidated astatements was adopted in case of Enron and Arthur Anderson. In this case, Enron Corporation presented a complex consolidated financial statement to misguide the investors and shareholders. The accounting executives of Enron Jefrrey Skilling and Andrew Fastow pressurized the financial managers to frame the financial statements in accordance to the Wall Street expectations thereby guiding the losses and debts of the company. The Company adopted the Mark-to market accounting that showed inflated revenue in the income statement. Moreover, the company showed false acquisitions within the financi al statement in order to be able to prepare consolidated statements. The financial managers thus hid the losses in the context of the nonexistent subsidiary companies. Reinstein and Weirich (2002) opined that the use of the special purpose entities by Enron Corporation within their financial statements gave them the opportunity to manage the losses and manage risks related to specific assets. As per IAS 27, the company had no legal or financial obligation of presenting a separate individual financial report for the special purpose entities. Hence, it was an easy task for the company to hide its losses. Thus keeping in view the circumstances of Enron Corporation it may be suggested that consolidated statements give the organizations an opportunity to reduce losses however in an unethical manner. Argento et al. (2012) suggested that another major factor that acts as a motivator for the organizations in engaging in preparation of consolidated statements are opportunity of the companies to ethically balance the losses against the profits of the subsidiaries. The organizations with more than one subsidiary company have to show the overall financial performance in the consolidated income statement and balance sheet produced in the annual report. Thus if the parent company is suffering from some unforeseen losses then the company can balance the loss against the revenue gain of the subsidiary companies (Grossi and Tagesson, 2008). However, in this matter Ketz (2003) again argued that hiding of bankruptcies may be unethical in this context. Thus, Alfredson et al. (2012) highlighted the limitations of the consolidated statements from the viewpoint of the investors and shareholders. Firstly, the absence of any information about the subsidiary in the statement gives rise to unethical trading practices. Secondly, as per GAAP, the consolidated financial statements should not record any intercompany transactions. Thus, this makes it difficult for the investors to ascertain the flow of funds between subsidiaries. Apart from the intercompany transactions the shareholders equity, accounts payable and retained earnings are also excluded from the combined statements. For instance, the elimination of unrealized gain between the parent company and the subsidiary may also change the financial position of the organization as a whole. If the parent company produces a product costing $100 and sells it to subsidiary for $150 and the subsidiary is expected to sell it to the customers at $ 200 keeping a margin of $50 as a profit in each ca se, then on failure of the subsidiary to sell the product will give rise to an unrealized gain of $ 50. Thirdly, the financial ratios are the major indicators of the liquidity position of the company. However, the ratios calculated from the combined financial records are not the accurate and separate financial ratio. Thus, the investor is not able to judge the viability of the position of the parent company and its subsidiaries. Finally, Partnoy and Turner (2010) commented that use of off-balance sheet financing within the consolidated statements would also help the organizations to avoid situations of losses and present a sound financial view of the company. Conclusion The above discussion shows that the title of the essay is appropriately proven. The consolidated statements have the capability of helping the business cope with the future losses, however in an unethical manner. Thus, the organizations can take the help of the loopholes within the consolidated statements in order to avoid business losses and show sound financial projections. However, this will not guarantee a long-term financial security for the company and may result in situations of bankruptcies on the part of the subsidiary as well as the parent company. Reference list Alfredson, K., Leo, K., Picker, R., Pacter, P., Radford, J., and Wise, V. (2012).Applying international accounting standards. John Wiley Sons. Argento, D., Grossi, G., and Vollenweider, P. (2012). Explaining the consolidation of financial statementsin the Swiss Federal Government. Crstea, A. (2014). The Need for Public Sector Consolidated Financial Statements.Procedia Economics and Finance,15, 1289-1296. Cunningham, G. M., and Harris, J. E. (2006). Enron and Arthur Adndersen: The Case of the Crooked E and the Fallen A.Global Perspectives on Accounting Education,3, 27. Grossi, G., and Tagesson, T. (2008). Consolidated financial reports in local governments: a comparative analysis of IPSASB and SCMA. Ketz, J. E. (2003).Hidden financial risk: Understanding off-balance sheet accounting. John Wiley Sons. Notes, T. O. (2012). THE Financial Statements.For the year ended,31. Partnoy, F., and Turner, L. E. (2010). Bring Transparency to Off-Balance Sheet Accounting.Johnson and Payne (2010), 85-98. Reinstein, A., and Weirich, T. R. (2002). Accounting issues at Enron.CPA JOURNAL,72(12), 20-25. Tudor, A. T., and Mutiu, A. (2006). Cash versus accrual accounting in public sector.Unpublished Doctoral Dissertation, University of Babes Bolyai, Romania.