Page 565 - Accounting Principles (A Business Perspective)

14. Stock investments

A parent company and its subsidiaries maintain their own accounting records and prepare their own financial
statements. However, since a central management controls the parent and its subsidiaries and they are related to
each other, the parent company usually must prepare one set of financial statements. These statements, called

consolidated statements, consolidate the parent's financial statement amounts with its subsidiaries' and show
the parent and its subsidiaries as a single enterprise.
According to FASB Statement No. 94, consolidated statements must be prepared (1) when one company owns
more than 50 per cent of the outstanding voting common stock of another company, and (2) unless control is likely
to be temporary or if it does not rest with the majority owner (e.g. the company is in legal reorganization or
47
bankruptcy). Thus, almost all subsidiaries must be included in the consolidated financial statements under FASB
Statement No. 94. Previously, the consolidated statements did not include subsidiaries in markedly dissimilar

businesses than those of the parents.

An accounting perspective:

Business insight

Procter & Gamble markets more than 300 brands. Examples include Tide, Ariel, Pantene Pro-V,
Pringles, and Folgers. The company's 2000 annual report includes the following information about
presentation of subsidiaries and equity investments:
The consolidated financial statements include The Procter & Gamble Company and its controlled
subsidiaries (the Company). Investments in companies over which the Company exerts
significant influence, but does not control the financial and operating decisions, are accounted
for by the equity method.

Financial transactions involving a parent and one of its subsidiaries or between two of its subsidiaries are
intercompany transactions. In preparing consolidated financial statements, parent companies eliminate the
effects of intercompany transactions by making elimination entries. Elimination entries allow the presentation
of all account balances as if the parent and its subsidiaries were a single economic enterprise. Elimination entries
appear only on a consolidated statement work sheet, not in the accounting records of the parent or subsidiaries.
After elimination entries are prepared, the parent totals the amounts remaining for each account of the work sheet
and prepares the consolidated financial statements.
To illustrate the need for elimination entries, assume Y Company formed the Z Company, receiving all of Z

Company's USD 100,000 par value common stock for USD 100,000 cash. If the stock of an existing company had
been acquired, it would have been purchased from that company's stockholders. The parent records the following
entry on its books:
Investment in Z Company (+A) 100,000
Cash(-A) 100,000
To record an investment in Z Company.
Purchased 100% of Z Company stock.
47 FASB, Statement of Financial Accounting Standards No. 94, "Consolidation of All Majority-Owned
Subsidiaries" (Stamford, Conn., 1987), p. 5. Copyright © by the Financial Accounting Standards Board, High

Ridge Park, Stamford, Connecticut 06905, U.S.A.

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