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ACCA Applied Skills · Financial Reporting · Limitations of financial statements

Parent P acquired 80% of S during the year. The consolidated statements show a current ratio of 1.8, while P's and S's individual ratios are 1.2 and 3.0. Which limitation of group financial statements does this best illustrate?

Group ratios aggregate different entities, so a healthy group current ratio may hide a weak parent and a strong subsidiary. Liquidity in the subsidiary may not be freely available to the parent, particularly with a non-controlling interest, so group figures can mislead.

  1. AGroup figures aggregate entities with differing financial profiles, so group ratios may hide problems or strengths in individual entitiesCorrect
  2. BConsolidation removes all intra-group balances, so ratios become meaningless
  3. CGroup statements must exclude subsidiaries with higher ratios
  4. DA subsidiary's liquidity is always reflected in the parent's individual statements

Explanation

Consolidated statements combine the entities into one set of figures, so they may mask that P has weak liquidity and S strong liquidity; the cash of S may not be freely available to P, as there is a 20% non-controlling interest. Eliminating intra-group balances is appropriate and does not make ratios meaningless.

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