Running Head: MEMO 1
To: ABC
From: XYZ
Date: August 05, 2022
Subject: Acquisition of Stargell Corp. by Posey Co.
The US dollar-based company Posey has acquired Stargell Corporation. The Stargell
Corporation is a foreign subsidiary using non-functional currency. In order to prepare a
consolidated financial statement, it is important to include certain financial calculations that
reflect the merging of the parent company and the subsidiary company. Moreover, the financial
statements of the foreign subsidiary company need to be translated into the reporting currency
used by the parent company (Bragg, 2022). In consolidated financial statements, all the
financial accounting functions need to be combined and integrated in order to ensure
consolidation of the income statement, balance sheet, and cash flow statement. For the
translation of the currency, two methods can be used. It includes the temporal method and the
current rate method. The current rate method is used for translating the self-sustaining
operations. The temporal method is used for translating the integrated operations. This method
is generally used when the parent company and subsidiary company use different currencies.
Apart from the current rate and temporal translation methods, it is also important to identify
the four non-controlling interest figures and add them to the consolidation process. The
exchange rate may vary on the basis of the account type. The section of stockholder’s equity
present on the consolidated worksheet makes use of the historical exchange rates. In case the
conversion of the financial statements of the foreign subsidiary into the parent company’s
reporting currency results in translation adjustment, the loss or profit is to be reported in other
comprehensive income.
The consolidated financial statements are to be prepared on an annual basis. The filling
criteria depend on the ownership level that the parent company has on the subsidiary company.
MEMO 2
The process can be broken down into a number of steps. The first step includes the collection
of the individual financial statement of the parent company as well as the foreign subsidiary
company. In the second step, the fair value of the net assets of the foreign subsidiary company
and the value of consideration transferred is identified. The subsidiary books are brough back
to fair value. This is done by passing the consolidation entries in order to create an investment
in the account of the subsidiary company.
In the third step, the investment present in the foreign subsidiary account, as well as the
equity accounts, are removed. It is done as they already appear in the financial statement of the
parent company. In the fourth step, the potential group transactions are properly adjusted. It
may include the gains in the inventory or loans made by both the parent company and the
financial subsidiary. In the fifth step, the consolidated net income, as well as the net income of
non-controlling interest, is calculated. The calculation is then used in order to work out the
non-controlling interest and consolidated retained earnings. In the sixth step, the equity
accounts and the individual book values of the liabilities, as well as assets, are integrated. The
consolidated balance sheet account is prepared through the elimination and adjustment of the
entries.
For the preparation of the consolidated financial statements, the Accounting Standards
Codification 830-230can provide the translation directions on the basis of functional currency.
Statement of Cash flow
In order to show the statement of cash flow, two methods can be used. It includes the
indirect method and the direct method. In the direct method, the company has to reflect all the
information relating to current cash flow that is directly associated with different items
responsible for triggering cash flows. It includes the cash paid by the customers of the
company, interest paid, interest income, cash paid to the suppliers and customers, as well as
dividends received.
MEMO 3
The indirect method includes the reporting of the net loss or net income on the income
statement of the company. Then a number of adjustments are to be made in order to arrive at
the EBITDA from operating activities or net cash provided. The adjustments that are to be
made include loss or gain on sales of assets, amortization, depreciation, change in payables,
and change in receivables.
In order to prepare the statement of cash flows, it is important to ensure that the foreign
currency cash flows are stated in the reporting currency. It includes a number of steps. In the
first step, the individual statement of cash flow is prepared for the parent company as well as
the foreign subsidiary. In the second step, the suitable exchange rate is identified. For the
purpose of calculation, the weighted average exchange rate can be used in the reporting period.
In the third step, the individual cash flow statements of all the companies, which include the
foreign subsidiary and the parent company, are combined. It results in the creation of the
consolidated statement of cash flows, which includes the accounts payables, account
receivables, and other important items.
References
Bragg, S. (2022, March 22). Foreign currency translation definition. AccountingTools.
Retrieved August 5, 2022, from https://www.accountingtools.com/articles/foreign-
currency-translation.html
