Post responses to two of your classmates. 2-3 sentences
Consolidated financial reporting for transactions with controlled entites has a direct impact when reporting financial transactions. When looking at consolidated journal entries for the income statement the only reporting of income and expenses are noted when they occur with outside companies, not with intra-group because the transactions essentially cancel each other out. In this case, if you paid out to the subsidary the parent company would not record this on the consolidated statement as an expense and the subsidary would not show this as revenue on the consolidated statement because they canceled out. This is different than the consolidated balance sheet because on the balance sheet you report all the subsidiary and parent companies’ assets and liabilities (Thompson, 2018).
A real-life example of this would be if a subsidiary company paid dividends to a parent company then on a parent company’s financial statement the dividends would be reported, however, on a consolidated statement the dividends would be omitted.
Thompson, J. (2018, December 24). Financial statement consolidation rules. Small Business – Chron. Retrieved September 8, 2022, from https://smallbusiness.chron.com/financial-statement-consolidation-rules-5230.html
According to the source that I looked at, “when consolidating the group’s financial statements, you only report income and expenses from outside of the group of companies.” The effect that consolidation has on the financial reporting for transactions with controlled entities is that you only report income and expenses done with outside companies. Intra-group activities are not reported because the transactions end up eliminating/canceling each other out. While intra-group activities are not reported due to canceling each other out, “the consolidated balance sheet reports all the subsidiary company’s assets and liabilities on the parent company’s balance sheet.” More is reported on the consolidated balance sheet.
One real life example would be if you are doing business with an outside company and an intra-group, you would report income and expenses from the outside company but not report intra-group activities because eventually they end up canceling each other out.
Jayne Thompson, “Financial Statement Consolidation Rules,” Chron, December 24, 2018