What do you understand by consolidation of financial
statements ? Write the advantages and disadvantages
of consolidated financial statements.
Answers
Answer:
Consolidated financial statements are financial statements of an entity with multiple divisions or subsidiaries. Companies can often use the word consolidated loosely in financial statement reporting to refer to the aggregated reporting of their entire business collectively
Explanation:
The purpose of consolidated financial statements is to present, primarily for the benefit of the owners and creditors of the parent, the results of operations and the financial position of a parent and all its subsidiaries as if the consolidated group were a single economic entity.
advantages:-
Consolidated statements allow investors, financial analysts, business owners and other interested parties to get a complete overview of the parent company. At a glance, they can view the overall health of the business and how each subsidiary impacts the parent company.
disadvantages:-
Consolidated financial statements are of limited use to the creditors and minority stockholders of the subsidiary. The subsidiary's creditors have a claim against the subsidiary alone; they cannot look to the parent company for payment
Answer:
a form of business organization which is established by the outright purchase of the properties of constituent organizations and the merging or amalgamating of such properties into a single business unit”.
Advantages :
1. Economies of Scale: Combination of two or more organizations results in a single large organization. The large organization enjoys economies of scale in buying (quantity discounts because of bulk purchases), marketing (advertisement time in media is bought in bulk and therefore costs less) etc.
2. Unity of interest: There is unity of interest and less scope for manipulation of affairs of constituent companies.
3. Stability: When compared to other forms of combinations, complete consolidation has more stability and enjoys longer life.
4. Simple structure: The organization structure is simple. Therefore it is easy to manage and control.
5. Economy of management: Since there is one single entity, the expense of managing is less when compared to a holding company structure where a number of officials have to be employed.
Disadvantages :
1. Difficult to form: Consent of a large majority of shareholders of the constituent companies has to be obtained for forming a complete consolidation.
2. Expensive to form: Various legal formalities have to be observed and it is both time consuming and expensive to form.
2. Expensive to form: Various legal formalities have to be observed and it is both time consuming and expensive to form.3. Loss of Goodwill: In the case of merger, the absorbed entity loses its separate entity and in amalgamation all the combining business loses their entity. The goodwill that these companies would have created is lost when they lose their separate existence.
2. Expensive to form: Various legal formalities have to be observed and it is both time consuming and expensive to form.3. Loss of Goodwill: In the case of merger, the absorbed entity loses its separate entity and in amalgamation all the combining business loses their entity. The goodwill that these companies would have created is lost when they lose their separate existence.4. Problem of over capitalization: When business units combine it might result in over capitalization. Shareholders would not get an adequate return on their capital.
2. Expensive to form: Various legal formalities have to be observed and it is both time consuming and expensive to form.3. Loss of Goodwill: In the case of merger, the absorbed entity loses its separate entity and in amalgamation all the combining business loses their entity. The goodwill that these companies would have created is lost when they lose their separate existence.4. Problem of over capitalization: When business units combine it might result in over capitalization. Shareholders would not get an adequate return on their capital.5. Inefficiency: Consolidation may result in very large units. If proper management processes and systems are not in existence, it may lead to inefficiency and losses.
2. Expensive to form: Various legal formalities have to be observed and it is both time consuming and expensive to form.3. Loss of Goodwill: In the case of merger, the absorbed entity loses its separate entity and in amalgamation all the combining business loses their entity. The goodwill that these companies would have created is lost when they lose their separate existence.4. Problem of over capitalization: When business units combine it might result in over capitalization. Shareholders would not get an adequate return on their capital.5. Inefficiency: Consolidation may result in very large units. If proper management processes and systems are not in existence, it may lead to inefficiency and losses.6. Lack of flexibility: Large units do not have flexibility. A large organization has very less dynamism and ability to adapt to changing business environment.
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