Financial Accounting: In an Economic Context

CONSOLIDATED FINANCIAL STATEMENTS

Many companies expand by purchasing other companies and/or extending operations into other countries. For example, as of December 31, 2008, Johnson & Johnson, one of the world's largest consumer products companies, owned more than 200 companies that operated in almost every country of the world. In a typical year, Johnson & Johnson spends $1 billion acquiring other domestic and foreign operations. Each of these acquisitions involves acquiring large amounts of the outstanding equity securities of the investee companies. This appendix covers the methods used to account for investments in excess of 50 percent of the investee company's outstanding voting stock.

Such transactions give rise to consolidated financial statements, which reflect the combined accounts of both the investor and the investee companies. Virtually all major U.S. corporations prepare financial statements on a consolidated basis. The following excerpt is from the 2008 financial report of IBM and is typical of the disclosures made by other major U.S. companies.

The consolidated financial statements include the accounts of IBM and its controlled subsidiaries, which are generally majority owned. Investments in . . . business entities in which the company . . . has the ability to exercise significant influence . . . are accounted for using the equity method.

Accounting for Business Acquisitions and Mergers: The Purchase Method

Equity shares in other companies can be acquired by paying ...