Introduction to Accounting - Essay Example

Introduction to Accounting Group Accounts The bigger companies of the world are formed by some heavy investment, proper management, getting the right ideas and implementing them, and support and backup from parent or sister companies. Some of the largest groups in the world include Pepsi Co. which owns Pepsi Cola, Frito-Lays, Gatorade, Tropicana and Quaker. According to Forbes Fortune 500 companies, the top 5 groups in 2007 included Wal-Mart Stores, Exxon Mobil, General Motors, Chevron, ConocoPhillips.

The common point about these groups is that they all own a range of companies and hence are called groups. (Fortune 500, 2007) Groups are treated as a single entity for the purpose of showing the financial position of the range of companies including parent (holding) company, its subsidiaries, associated companies and other investments such as joint ventures. These financial statements are known as consolidated financial statements because all the accounts of the companies are consolidated to form just one set of accounts.

This is done for the better management of accounts, tax cuts, measurement of the size and extent of the business and also it is a requirement in some cases (Brennan & Pierce, 2003). The case discussed below is per USGAAP treatment of group accounts. (Definitions, 2008)When the company owns or purchases 50% or more of the outstanding common stock, the purchasing company has control over the acquired company. Control in this context is defined as ability to direct policies and management. In this type of relationship the controlling company is the parent and the controlled company is the subsidiary.

The parent company needs to issue consolidated financial statements at the end of the year to reflect this relationship. Consolidated financial statements show the parent and the subsidiary as one single entity. During the year, the parent company can use the equity or the cost method to account for its investment in the subsidiary. Each company keeps separate books. However at the end of the year a consolidation working paper is prepared to combine the separate balances and to eliminate the intercompany transactions, the subsidiary's stockholder equity and the parent's investment account.

The result is one set of financial statements that reflect the financial results of the consolidated entity (Sangster & Wood, 1999); (Brennan & Pierce, 2003).Cash FlowsCash flow is defined in FRS 1 as 'an increase or decrease in an amount of cash'. For a company, some or most of the transactions are credit based thus cash is paid sometimes later. The income statement is made on the accruals concept that all entries should be made even if they regard to some times later. Therefore the real cash the company holds is not visible through the income statement.

A company would need to know how much cash is available because it would want to evaluate the state or performance of a business or to determine the liquidity or to base investment decisions to generate project rate of returns. (Sangster & Wood, 1999)For these reasons, accountants make a Cash Flow Statement and show cash transactions under the three headings explained below. (Definitions, 2008)1. Operational cash flows: Cash received or expended as a result of the company's core business activities.2. Investment cash flows: Cash received or expended through capital expenditure, investments or acquisitions.3. Financing cash flows: Cash received or expended as a result of financial activities, such as receiving or paying loans, issuing or repurchasing stock, and paying dividends.

Through a cash flow statement, a company can determine its short-term sustainability based on how the liquid the company is. Daily operations are dependent on the liquidity hence, a highly liquid company would indicate that the company can cater to it daily needs easily. Also, since the cash flows are broken up into three headings, it is possible for the management to identify the most cash-generating parts of their company to improve them and resolve the cash crisis. (Sangster & Wood, 1999)Works Cited1.

Brennan, Niamh & Pierce, Aileen (2003), "Principles and Practice of Group Accounts", First Edition, CENGAGE Lrng Business Press2. Definitions (2008), Retrieved on January 13, 2008 from www.wikipedia.com 3. Sangster, Alan & Wood, Frank (1999), "Business Accounting 2", Eight Edition, Prentice Hall: Great Britain