Fractal Software Limited has acquired a 100% subsidiary in Malaysia that produces keyboards and other types of computer hardware.Fractal is refusing to consolidate its financial statements,as this would increase the debt to equity ratio to the point that Fractal would violate its debt agreement,although it would benefit the current ratio with a sizeable increase in inventory.Instead,Fractal would like to record the investment in the Malaysian subsidiary at cost.What type of effect does the non-consolidation have upon the financial statements?
A)material and isolated
B)material
C)material and pervasive
D)immaterial

Question

Quizplus · Accepted Answer

The non-consolidation of financial statements has a material and pervasive impact. Material because the subsidiary is a significant investment and pervasive because it affects both the debt to equity ratio and the current ratio. By not consolidating, the financial statements do not show a complete picture of the company's financial position and performance.

Fractal Software Limited Has Acquired a 100% Subsidiary in Malaysia