UGC NET COMMERCE January 2017(Paper-II) Q6
0. Consolidated financial statements are prepared on the principle
- Option : C
- Explanation : Consolidated financial statements of a group of companies are prepared on the basis of single economic entity concept.
Definition : Single Economic Entity Concept suggests that companies associated with each other through the virtue of common control operate as a single economic unit and therefore the consolidated financial statements of a group of companies should reflect the essence of such arrangement.
Explanation : Consolidated financial statements of a group of companies must be prepared as if the entire group constitutes a single entity in order to avoid the misrepresentation of the scale of group’s activities.
It is therefore necessary to eliminate the effects of any inter-company transactions and balances during the consolidation of group accounts such as the following:
∎ Inter-company sales and purchases
∎ Inter-company payables and receivables
∎ Inter-company payments such as dividends, royalties and head office charges
∎ Inter-company transactions must be eliminated as if the transactions had not occurred in the first place. Examples of adjustments that may be required to eliminate the effects of inter-company transactions include:
∎ Elimination of unrealized profit or loss on the sale of assets member companies of a group
∎ Elimination of excess or deficit depreciation expense in respect of a fixed asset purchased from a member company at a price that was higher or lower than the net book value of the asset in the books of the seller.
