You are on page 1of 21

Introduction to Management Accounting

all Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahle

Introduction to Management Accounting

Chapter
17

Understanding and Analyzing


Consolidated Financial
Statements

all Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahle

Learning
Objective 1

Intercorporate Investments

How do we account for intercorporate investments?

Investor holds less than 20%


Market-value method

all Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahle

Intercorporate Investments

Investor holds between 20% and 50%


Equity method
Investor holds more than 50%
Consolidation
approach

all Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahle

Market Method

Trading securities are investments


that the investor company buys only
with intent to resell them shortly.
Available-for-sale securities are
investments that the investor
company has no intention
to sell in the near future.

all Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahle

Market Method

Trading securities and available-for-sale


securities provide returns to
the investor in two ways:
Dividend
revenue

Changes in
market value

all Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahle

Market Method

Dividends are recorded on the


income statement when earned
for both types of investments.
Changes in market value are
accounted for differently for
trading securities than for
available-for-sale securities.

all Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahle

Changes in Market Value

the market value of trading securities changes, companie


report the gains/losses from increases/decreases
in price and losses on the income statement.

ns and losses that arise as market values of available-for-s


curities rise and fall are not shown on the income stateme
Unrealized gains and losses are added
to a separate valuation allowance account in
the stockholders equity section of the balance sheet.

all Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahle

Learning
Objective 2

Consolidated Financial Statements

Parent company > 50%


Subsidiary company

all Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahle

Consolidated Financial Statements

Parent companies must issue consolidated financial


statements that combine the financial statements
of the parent company with those of various
subsidiaries, as if they were a single entity.

all Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahle

Acquisition of a Subsidiary

Suppose Company P (parent) acquired 100% of the


common stock of Company S (subsidiary) for
$210 million in cash at the beginning of the year.
The $210 million is not an addition to the
existing assets and stockholders equity of S.
P pays the $210 million to the former
owners of S as private investors.

all Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahle

Acquisition of a Subsidiary

Assets

= Liabilities +

Stockholders
equity

InvestCash,
Accounts
Stockment + other = payable, + holders
in S
assets
etc.
equity
Ps accounts, January 1:
Before acquisition
Acquisition of S
Ss accounts, January 1:
Intercompany eliminations for a consolidated
balance sheet
Consolidated, January 1

+210

210
0

650
210
400

=
=
=

840

=
=

200

450

190

210

210
450

390

all Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahle

Acquisition of a Subsidiary

Each legal entity has its


individual set of books.

The consolidated entity


does not keep a
separate set of books.

all Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahle

Acquisition of a Subsidiary

To avoid double-counting, the evidence


of ownership is eliminated that
is present in two places:
The Investment in S on Ps books
The Stockholders Equity on Ss books

all Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahle

Analysis of Financial Statements

Careful analysis of financial statements


can help decision makers evaluate an
organizations past performance and
predict its future performance.

all Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahle

Component Percentages

Financial statements, expressed


in component percentages, are
called common-size statements.

all Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahle

Learning
Objective 4

Some Typical Financial Ratios

Current ratio
Average collection period in days
Total debt to equity
Gross profit rate or percentage
Return on sales

all Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahle

Some Typical Financial Ratios

Return on stockholders equity


Earnings per share
Price earnings
Dividend yield
Dividend payout

all Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahle

Comparisons

Evaluation of a financial ratio


requires a comparison.
There are three main types of comparisons:
1. With a companys own historical ratios
(called time-series comparisons)

all Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahle

Comparisons

2. With general rules of thumb or benchmarks


3. With ratios of other companies or with
industry averages for the same period
(called cross-sectional comparisons)

all Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahle

The End

End of Chapter 17

all Business Publishing, Introduction to Management Accounting 14/e, Horngren/Sundem/Stratton/Schatzberg/Burgstahle