Introduction to Accounting

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The bigger companies of the world are formed by some heavy investment, proper management, getting the right ideas and implementing them, and support and backup from parent or sister companies. Some of the largest groups in the world include Pepsi Co. which owns Pepsi Cola, Frito-Lays, Gatorade, Tropicana and Quaker…

Introduction


Groups are treated as a single entity for the purpose of showing the financial position of the range of companies including parent (holding) company, its subsidiaries, associated companies and other investments such as joint ventures. These financial statements are known as consolidated financial statements because all the accounts of the companies are consolidated to form just one set of accounts. This is done for the better management of accounts, tax cuts, measurement of the size and extent of the business and also it is a requirement in some cases (Brennan & Pierce, 2003). The case discussed below is per USGAAP treatment of group accounts. (Definitions, 2008)
When the company owns or purchases 50% or more of the outstanding common stock, the purchasing company has control over the acquired company. Control in this context is defined as ability to direct policies and management. In this type of relationship the controlling company is the parent and the controlled company is the subsidiary. The parent company needs to issue consolidated financial statements at the end of the year to reflect this relationship. Consolidated financial statements show the parent and the subsidiary as one single entity. During the year, the parent company can use the equity or the cost method to account for its investment in the subsidiary. Each company keeps separate books. ...
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