Consider the following statement: It is irrelevant to consider the effects of co
ID: 2565694 • Letter: C
Question
Consider the following statement: It is irrelevant to consider the effects of consolidation on the statement of cash flows for three reasons: The consolidated balance sheet already accounts for cash consolidations. Consolidating procedures wash out the effect of cash on consolidating transactions anyway. Investors don’t actually use the statement of cash flows in decision-making. Instead, they focus on the income statement and balance sheet.
Do you agree that the consideration of consolidations on the statement of cash flows is irrelevant? Why or why not
? Which of the mistakes and errors listed in the article “Three Common Currency Adjustment Pitfalls” are relevant to investors who might be reading a consolidated statement of cash flows?
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Explanation / Answer
Answer: I will agree with the statement.
Reasons: 1. When you consolidate the financial statements, all books of accounts are prepared based on accrual system of accounting. Consideration of consolidation on cash flow statement is irrelevant.
Because , in cash flow statement, we show the cash flows through operating activities, investing activities and financing activities. But when we prepare financial statements, the cash position automatically adjusted in the books of accounts.
2. Consolidating procedures wash out the effect of cash on consolidation transactions anyway. Because when you consolidate the cashflows, we don't consolidate as activities wise, rather , we do on aggregate basis. In that sense, cash effect won't be there on consolidation transactions.
3. Generally for investors, cash flow statement or cash flow position is not important. Every investor will look into organisation earnings ( income statement), it's net-worth (Balance sheet).
There are no mistakes in the article