Detailed Answer
(d) The requirement is to determine which accounting
concept relates to the preparation of consolidated financial
statements. Answer (d) is correct because when a parentsubsidiary
relationship exists, the financial statements of each
separate entity are brought together, or consolidated. When
financial statements represent a consolidated entity, the concept
of economic entity applies. Answer (a) is incorrect because reliability
is a concept that applies to all financial statements, not just
consolidated financial statements. Reliability is a primary quality
that makes accounting information useful for decision making.
This quality should be found in all statements. Answer (b) is
incorrect because the concept of materiality applies to all financial
statements, not just consolidated financial statements. The
concept of materiality, as applied to financial statements, deals
with the impact an item in the financial statements will have on a
user’s decision-making process. Answer (c) is incorrect because
the concept of legal entity refers to the form or type of combination
that takes place between entities (i.e., mergers, consolidations
or acquisitions), not the basis on which financial statements
are prepared.