CPA FAR - Consolidated Financial Statements Exam Questions with Answers
What are two objective differences between U.S. Generally Accepted Account Principles (GAAP) and International Financial Reporting Standards (IFRS) in determining control? - ANS: Under U.S. GAAP only outstanding voting rights are used to measure control; under IFRS securities currently exercisable or convertible into voting rights are used in assessing control.
Under U.S. GAAP only if an entity has more than 50% voting ownership can it have control. Under IFRS an entity may have control even when it does not have more than 50% voting control.
Under U.S. GAAP, what process must be followed to determine if an entity should be consolidated? - ANS: First, it must be determined if the entity is a variable-interest entity (VIE). If it is, the reporting entity must determine if it is the primary beneficiary of the VIE and, if so, consolidate the VIE. Then, if the entity is not a VIE, the reporting entity must determine if it has controlling voting interest in the entity. If so, and nothing prevents the exercise of that control, the reporting entity (parent) must consolidate the entity (subsidiary).
What is the requirement and justification for the use of consolidated financial statements? - ANS: Consolidated financial statements are required when one entity has effective control of another entity. Because the entities are under common control, GAAP requires that consolidated financial statements be the primary form of financial reporting for the affiliated entities.
While in form the entities may be separate legal entities, because of the common control, in substance they are a single economic entity and their financial statements should be presented as a single economic entity.
Where is the consolidating process carried out? - ANS: On a consolidating worksheet; not on the books of any entity.
What are the alternative circumstances that affect adjustments and eliminations made in the consolidating process? (Disregard pooling of interests consideration.) - ANS: 1. Whether the parent carries its investment using the cost or equity method; 2. Whether the consolidation is carried out at the date of the business combination or at a subsequent date;
3. Whether the parent owns 100% (all) of the voting stock of a subsidiary or less than 100% of the stock;
4. Whether transactions between the affiliated companies originate with the parent or subsidiary.
Define "consolidated financial statements". - ANS: Consolidated financial statements present the financial information of two or more separate legal entities, usually a parent company and one or more of its subsidiaries, as though they were a single economic entity.
What is the basic sequence of steps in the consolidating process? - ANS: 1. Record trial balances on consolidating worksheet;
2. Record adjusting entries, if any;
3. Record eliminating entries;
4. Complete consolidating worksheet;
5. Prepare consolidated financial statements.
Identify the general kinds of eliminating entries made in the consolidating process. - ANS: 1. Investment eliminating entry. (Always);
2. Intercompany Receivables/Payables elimination(s);
3. Intercompany Revenues/Expenses elimination(s);
4. Intercompany Profit elimination(s).
What are the kinds of information needed to prepare consolidated financial statements? - ANS: 1. Financial statements/Adjusted trial balances of affiliated entities;
2. Data as of date of acquisition, including: 1. Book values of subsidiary's assets and liabilities; 2. Fair values of subsidiary's assets and liabilities; 3. Fair value of noncontrolling interest, if any; 4. Fair value of precombination equity interest, if any.
3. Intercompany transaction data and balances.
What are two objective differences between U.S. Generally Accepted Account Principles (GAAP) and International Financial Reporting Standards (IFRS) in determining control? - ANS: Under U.S. GAAP only outstanding voting rights are used to measure control; under IFRS securities currently exercisable or convertible into voting rights are used in assessing control.
Under U.S. GAAP only if an entity has more than 50% voting ownership can it have control. Under IFRS an entity may have control even when it does not have more than 50% voting control.
Under U.S. GAAP, what process must be followed to determine if an entity should be consolidated? - ANS: First, it must be determined if the entity is a variable-interest entity (VIE). If it is, the reporting entity must determine if it is the primary beneficiary of the VIE and, if so, consolidate the VIE. Then, if the entity is not a VIE, the reporting entity must determine if it has controlling voting interest in the entity. If so, and nothing prevents the exercise of that control, the reporting entity (parent) must consolidate the entity (subsidiary).
What is the requirement and justification for the use of consolidated financial statements? - ANS: Consolidated financial statements are required when one entity has effective control of another entity. Because the entities are under common control, GAAP requires that consolidated financial statements be the primary form of financial reporting for the affiliated entities.
While in form the entities may be separate legal entities, because of the common control, in substance they are a single economic entity and their financial statements should be presented as a single economic entity.
Where is the consolidating process carried out? - ANS: On a consolidating worksheet; not on the books of any entity.
What are the alternative circumstances that affect adjustments and eliminations made in the consolidating process? (Disregard pooling of interests consideration.) - ANS: 1. Whether the parent carries its investment using the cost or equity method; 2. Whether the consolidation is carried out at the date of the business combination or at a subsequent date;
3. Whether the parent owns 100% (all) of the voting stock of a subsidiary or less than 100% of the stock;
4. Whether transactions between the affiliated companies originate with the parent or subsidiary.
Define "consolidated financial statements". - ANS: Consolidated financial statements present the financial information of two or more separate legal entities, usually a parent company and one or more of its subsidiaries, as though they were a single economic entity.
What is the basic sequence of steps in the consolidating process? - ANS: 1. Record trial balances on consolidating worksheet;
2. Record adjusting entries, if any;
3. Record eliminating entries;
4. Complete consolidating worksheet;
5. Prepare consolidated financial statements.
Identify the general kinds of eliminating entries made in the consolidating process. - ANS: 1. Investment eliminating entry. (Always);
2. Intercompany Receivables/Payables elimination(s);
3. Intercompany Revenues/Expenses elimination(s);
4. Intercompany Profit elimination(s).
What are the kinds of information needed to prepare consolidated financial statements? - ANS: 1. Financial statements/Adjusted trial balances of affiliated entities;
2. Data as of date of acquisition, including: 1. Book values of subsidiary's assets and liabilities; 2. Fair values of subsidiary's assets and liabilities; 3. Fair value of noncontrolling interest, if any; 4. Fair value of precombination equity interest, if any.
3. Intercompany transaction data and balances.
