Sample Finance Paper on Advanced Accounting

In his article the “Reporting Entity and Consolidated Financial Statements”, Abir, Md.
Zaber Tauhid defines financial accounting as a combination of financial statement from the
mother company and its branches. Financial statements help in measuring the overall status of
the entire group of companies. Consolidate financial statement give better results of the financial
status of individual reports of related companies.
Consolidated financial accounts are prepared to be used by creditors, investors and
resource providers of the mother company. The reports have the following benefits. First, they
give a broad picture. Investors do not have to analyze different financial reports in order to know
the overall performance of the company. Secondly, consolidating financial statements helps in
proper balancing of the mother company and the subsidiaries. Poor performance in one company
is balanced with positive performance of other companies. Thirdly, consolidating financial
accounts helps in exclusion of company sectors that are not appealing. This acts as an advantage
because the investors are kept away from negative conditions that are temporary.
Further, consolidating financial statements helps in simplifying organization’s results.
The sales and purchases in different subsidiaries of the company are canceled thus simplifying
the financial status. These financial statements are also compulsory requirements by most
governments since they are required to give accurate status of the mother company. The seventh
benefit of consolidating financial reports is that it creates efficiency in an organization. Investors
can use the single report to determine the financial status of the entire chain of companies.
Lastly, consolidating financial reports helps in preventing fraud by exposing the
underperforming divisions and product lines.

The article has also discussed the limitations of consolidated financial reports. Lack of
subsidiary information is one of the limitations. Consolidated reports offer limited information
about an organization because several companies are viewed as one. Secondly, financial reports
eliminate important intercompany transactions, which can be used to determine the viable
sections in a company. Thirdly, consolidated financial reports have major loopholes, which are
caused by consolidation of ventures. This allows unscrupulous organizations to hide huge debts
which the organization owns its investors. Further, the consolidated reports hide poor
performance because the revenues and profits of different companies are presented as one report.
The article also outlines various methods of consolidations. The proprietary theory is the
first method of consolidating financial reports. This method does not draw a legal boundary
between the owners and the purpose of consolidation. The main aim of using this method is to
give the owners significant information of the organization. The second theory is parent
company theory, which is more relevant in the modern corporation than proprietor theory. This
theory claims that although the mother company does not own the assets directly, it has power of
exercising control over all assets in the branches. The last approach is the entity theory where
legal entity is separated from the owners. The financial reports are prepared to be used by the
government, and other stakeholders such as investors and service providers. This approach
claims that the activities of the business are separated from the decisions of the owners.
The author concludes by noting that consolidating financial reports helps in simplifying
the evaluation process of an organization. Without this report evaluation of a company for the
purpose of investment would not be effective. This is because consolidated financial statements
give all information regarding the assets in all subsidiaries. Therefore, auditors should ensure
that the consolidated financial reports reflect the true nature of the organization.