8. Pertinent facts which should be shown in finan cial accountant clearly recognizes that in preparing financial statements for any organ ization he should present all the pertinent facts about the financial status and the result of operation of the organization. If he finds that the presentation of a statement of assets and liabilities of a holding com pany as shown by its books, or the income account of a holding company as shown by its ledger, does not truly state the facts, which are of interest and im portance to the stockholders, he must present the in formation in such form as will properly disclose the facts. The accountant clearly recognizes that from the point of view of the stockholders of the holding company, the legal network of subsidiary organiza tions is pure fiction. The stockholders of the holding company are not affected at all by the relation existing between the holding company and its sub sidiaries, or between the subsidiaries themselves. The relation which the entire group has to outsiders, cred itors and bondholders, alone are matters of vital im portance.
9. Statements in form of balance sheets and income• that the balance sheet and in come account of a holding company does not suffi ciently show the relation of the group of companies, to outsiders, the accountant prepares a statement to convey this information. These statement's take the form of combined balance sheets and income accounts ; the former set forth the combined, assets and liabili ties, eliminating inter-company transactions, and showing only the liabilities and capital stock out standing, due to or held by, the public. Inter-com pany siles and purchases are eliminated, and only those purchases and sales made by the group of com panies from or to outsiders are included. Many dif ficulties are encountered in the preparation of such statements, and some of these will be considered in the present chapter and in a later chapter dealing with a consolidated balance sheet.
10. Financial results stated by means of consoli dated statements.—We therefore see that while no existing law would compel a holding company to have its financial statements made up in the manner uni versally agreed upon by accountants, and while we see also that there is no justification in law for the preparation of such statements, yet a logical applica tion of the fundamental principles of the science of accounting requires that the financial results be stated thru the means of consolidated statements. These re sults should be stated in such a manner as to show the income of the aggregation, eliminating inter-com pany transactions, and to show also the financial posi tion of the aggregation in so far as it is affected by the rights of bondholders, trade creditors and minority stockholders.
11. Consolidation of statements.—In passing, it might not be amiss to point out, that consolidation of statements and consolidated statements are entirely dissimilar. A consolidation of statements results when a combination of several existing companies is contemplated. The promoter of this combination wishes to know how the consolidation will work out and what will be the probable condition of the new combination. A consolidation of statements is sim ply the totaling of all items on each individual bal ance sheet into one combined statement, showing the condition of the companies if they were to be con solidated. In short it is a mere mathematical opera tion.
Consolidated statements, on the other hand, are prepared periodically after the combination has been formed, to show the progress that has been made by the group as a whole. Their preparation brings up many new and interesting questions. Some of the problems involved are similar to those discussed in the chapter on branch accounts in the Text on "Account ing Practice." It will be evident, then, upon reflection, that the balance sheet or income statement of a holding com pany alone would simply show its own activities, to gether with such earnings as are received from the dividends distributed by subsidiaries, and the interest earned on the bonds of subsidiaries. This is not suffi cient information for those interested in the holding company. Many changes—good or bad—may have taken place in the group which would not be reflected in the holding company's statement.
12. Factors not disclosed except thru the medium of consolidated statements.—T here are many possible factors which might be entirely overlooked in examin ing the financial statements of holding companies prepared in this manner. A brief consideration of some of these will give evidence of the futility of such a course. In this connection, it may also be men tioned that there will be much data regarding the con dition of the subsidiary corporations themselves which will not be disclosed by their own individual statements. Moreover, certain other factors will not be clearly in evidence even if one examines all of the statements at one time—that is, if the financial statement of the holding company and its subsidiaries are available for comparative examination. The mul tiplicity of items and the difficulty of following inter company transactions thruout their course renders such a practice of little value.