The combined financial statements of a parent company and its subsidiaries. Definition of 'Consolidated Financial Statements’:
Consolidated financial statements are the combined financial statements of a company and all of its subsidiaries, divisions, or suborganizations. Explanation:
Because consolidated financial statements present an aggregated look at the financial position of a parent and its subsidiaries, they enable you to gauge the overall health of an entire group of companies as opposed to one company's stand alone position. A consolidated financial statement gives investors a clear view of a corporation's global activities. A consolidated financial statement typically combines a company's operating activities with data from its subsidiaries. A consolidated financial statement helps an investor, a regulator or a corporation's top management evaluates the true financial standing of the corporation. A consolidated financial statement also may indicate an entity's financial position or cash flows during a period. Meaning of 'Consolidated Financial Statements’:
Let's assume Company XYZ is a holding company that owns four other companies: Company A, Company B, Company C, and Company D. Each of the four companies pays royalties and other fees to Company XYZ. At the end of the year, Company XYZ's income statement reflects a large amount of royalties and fees with very few expenses -- because they are recorded on the subsidiary income statements. An investor looking solely at Company XYZ's holding company financial statements could easily get a misleading view of the entity's performance. However, if Company XYZ consolidates its financial statements -- "adding" the income statements, balance sheets, and cash flow statements of XYZ and the four subsidiaries together -- the results give a more complete picture of the whole Company XYZ enterprise. In Figure 1 below, Company XYZ's assets are only Rs.1 million, but the consolidated number shows that the entity as a whole controls Rs.213 million in assets. In the real world, generally accepted accounting principles require companies to eliminate intercompany transactions from their consolidated statements. This means they must exclude movements of cash, revenue, assets, or liabilities from one entity to another in order to avoid double counting them. Some examples include interest one subsidiary earns from a loan made to another subsidiary, "management fees" that a subsidiary pays the parent company, and sales and purchases among subsidiaries.
What is Financial Statement Consolidation?
•Financial statement consolidation is an accounting procedure that allows a corporation to combine its financial data with information from subsidiaries. A consolidation accountant combines all balances based on percentage of ownership. Let's say Company A owns 100 percent of Company B. Company A has sales revenues of Rs.100 million and Rs.50 million in expenses during the month of May. Company B has Rs.20 million sales revenues and Rs.10 million in expenses. A consolidated financial statement for Company A will show Rs.120 million total sales and Rs.60 million total expenses. •A consolidated financial statement allows top management to gauge a corporation's true financial standing, profit levels and cash flow activities. A consolidated financial statement also may provide an investor or a regulator with useful information to understand the scope of a corporation's activities. As an illustration, a regulator may review our sample company's (Company A) consolidated operations and may note that the company operates in 23 countries and five continents.
Consolidated financial statements provide a comprehensive overview of a company's operations. Without them, investors would not have an idea of how well an enterprise as a whole is doing. Generally accepted accounting principles dictates when and how statements should be consolidated, and whether certain...