A SIMPLIFIED SOLUTION OF CIRCUIT RATIO PROBLEMS.
The difficulty presented by a circuit of intercom any ownership relations is familiar to those who are conversant with the preparation of consolidated statements. If Co. A owns 4/5 of the stock of Co. B and B owns 3/4 of the stock of C while C in turn owns 1/10 of A's stock, we have a situation which leads us into an infinite series when we apply the usual process of preparing a consolidated balance sheet. The equity of each company is dependent upon the equities of all of the other companies within the circuit. The standard method for the solution of problems of this type is the use of simultaneous equations. Each company has title to its own assets but of course those assets are subject to the claims of creditors so that the equity of stockholders in them is their net value. The profits earned after consolidation could be carried round and round the circuit until the remaining portion did not exceed one cent. Usually the fractional part of the stock of the major holding company in the group, which is owned by a subsidiary company, is small. As a result the amount carried forward to succeeding rounds of the circuit is rapidly reduced. But in spite of this fact the application of such a method would be very cumbersome indeed. However, it suggests a simple process, which obviates the necessity of using simultaneous equations.
- DOI
- 10.2308/tar-7038821
- Volume
- 18 (2)
- Pages
- 99-103
- Language
- en
- Export
- BibTeX
- Sources
- openalex crossref