Consolidated Financial Statements - Explained
What are Consolidated Financial Statements?
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Table of ContentsWhat are Consolidated Financial Statements?How are Consolidated Financial Statements Used?Consolidated Statement of IncomeConsolidated Balance SheetReporting RequirementsOwnership Calculation Methods
What are Consolidated Financial Statements?
A consolidated financial statement is a financial statement of a parent company and all its divisions or subsidiaries. A consolidated financial statement is often used by the Financial Accounting Standards Board in the context of a company that has a group of enterprises. In reality, however, many companies use consolidated financial statements to describe an aggregate report on an entire business, including its sections of segments. A consolidated financial statement reports all the revenues of the expenses of a group of companies. This financial statement gives an insight into the overall financial health or otherwise of a parent company and its subsidiaries.
How are Consolidated Financial Statements Used?
When collating the financial statement of a company, a parent company and its subsidiaries will report their finances distinctly, before the financial reports are aggregated to form a consolidated financial statement. Investors, market regulators, and financial analysts consider a consolidated financial statement to be a gauge of the overall financial state of a company.
Consolidated Statement of Income
A consolidated statement of income reports the expenses, revenue, and income of a parent company and those of its subsidiaries. In this financial statement, the assets, liabilities, cash flows, income and equity of a company and its divisions are stated. The consolidated statement of income does not include revenues generated internally by the parent company or its subsidiaries. However, in the legal sense, revenue generated by an entity offset the expenses in another entity. This means that the revenue generated by a parent company that is an expense of the subsidiary is not recorded on the consolidated statement of income.
Consolidated Balance Sheet
In a consolidated balance sheet, the assets and liabilities of a parent company and its subsidiaries are reported, these excluded the accounts payable and accounts receivables of these companies. When the assets and liabilities are being reported, it is without bias, they are reported generally without referring to which entity owns specific assets and which entities owe certain liabilities. Hence, items highlighted in the balance sheet and not distinguished from one entity to another. The eliminated account receivable and account payable balances and is also to ensure there is no distinction in the assets and liabilities of the companies or entities.
Reporting a consolidated financial statement must follow a particular guideline. The major reporting requirements for consolidated financial statements are;
- A consolidated financial statement must comply with the standards or acceptable accounting principles. GAAP principles must be duly complied with.
- The accounting methods used by the parent company and the subsidiaries must be the same.
- Accounts such as retained earnings, accounts receivable balance, accounts payable balance, common stock, and other equity accounts must be removed from the financial statements.
- The accounts of the subsidiaries must be readjusted to suit the present market value of all their assets.
Ownership Calculation Methods
Ownership interest is important when compiling consolidated financial statements, this is to say that only the financial statements of subsidiaries or companies owned by a parent company are included in a consolidated financial statement. Given that the percentage of ownership in subsidiaries vary, there are different ways ownership can be calculated. Either the cost method or equity method of financial reporting can be used. Consolidated financial statements are however not used for either equity method of financial reporting or the cost method.
- What are Financial Statements? – Financial Accounting
- What is the Income Statement? – Financial Accounting
- What is the Statement of Retained Earnings – Financial Accounting
- What is a Balance Sheet? – Financial Accounting
- What is the Statement of Cash Flow? – Financial Accounting