ACCA Financial Reporting (F7) Practice Exam

What is the purpose of eliminating intragroup transactions in consolidation?

1. To enhance profitability of the individual entities

2. To avoid double-counting within the group

3. To reflect accurate group cash flows

4. To align accounting policies across subsidiaries

The correct answer is: To avoid double-counting within the group

The elimination of intragroup transactions during consolidation serves a crucial purpose in ensuring that the financial statements of the group accurately reflect its economic reality. This process is essential to avoid double-counting of revenues and expenses that occur within the group entities. For instance, if one entity sells goods to another within the same group, both the selling entity would recognize revenue, and the purchasing entity would recognize an expense. If such transactions are not eliminated, the consolidated financial statements would overstate both revenue and expenses, leading to misleading results. By eliminating these intragroup transactions, the consolidated financial statements provide a clearer picture of the group’s overall financial position and performance, free from the distortions caused by internal transactions. This is key to ensuring that stakeholders can make informed decisions based on the true economic performance of the group as a whole. In contrast, other options do not accurately capture the primary reason for this process. Enhancing profitability of individual entities is not the goal of consolidation; rather, it’s about presenting a unified view. Reflecting accurate group cash flows is important, but the primary concern is about capturing real transactions, and aligning accounting policies, while important for consistency, does not directly relate to the necessity of eliminating intragroup transactions.