Sophie Bu inherited some investments, and she has received the annual reports of the companies in which the funds are invested. The financial statements of the companies are puzzling to Sophie, and she asks you the following questions:
a. The companies label their financial statements as consolidated balance sheet, consolidated income statement, and so on. What are consolidated financial statements?
b. Notes to the statements indicate that "certain intercompany transactions, loans, and other accounts have been eliminated in preparing the consolidated financial statements."
Why does a company eliminate transactions, loans, and accounts? Sophie states that she thought a transaction was a transaction and that a loan obligated a company to pay real money. She wonders if the company is juggling the books to defraud Canada Revenue Agency.
c. The balance sheet lists the asset Goodwill. What is goodwill? Does this mean that the company's shares have increased in value?
Required
Respond to each of Sophie Bu's questions.