Question

Which of the following is the best theoretical justification for consolidated financial statements? Multiple Choice

A.In form, the companies are one entity, in substance, they are separate.
B.In form, the companies are separate; in substance, they are one entity.
C.In form and substance, the companies are one entity.

Answer 1

The best theoretical justification for consolidated financial statements is option B: In form, the companies are separate; in substance, they are one entity.

Step-by-step explanation:

The best theoretical justification for consolidated financial statements is option B: In form, the companies are separate; in substance, they are one entity.

Consolidated financial statements are used when a company controls another company, typically through owning a majority of its voting shares. By consolidating the financial statements, the parent company can present a comprehensive view of its operations and financial position, including the assets, liabilities, revenues, and expenses of the subsidiary company.

This theoretical justification recognizes that legally the companies remain separate entities, but from a financial reporting perspective, the substance is that they operate as one entity under the control of the parent company.