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How It Works/example:: Consolidated Financial Statements Are The Combined Financial Statements of A

Consolidated financial statements combine the financial statements of a company and all its subsidiaries to provide a comprehensive overview of the company's total operations and financial position. Without consolidated statements, investors would get a misleading view of a company's performance from just its holding company statements. Consolidated statements eliminate double counting from intercompany transactions according to GAAP.

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27 views

How It Works/example:: Consolidated Financial Statements Are The Combined Financial Statements of A

Consolidated financial statements combine the financial statements of a company and all its subsidiaries to provide a comprehensive overview of the company's total operations and financial position. Without consolidated statements, investors would get a misleading view of a company's performance from just its holding company statements. Consolidated statements eliminate double counting from intercompany transactions according to GAAP.

Uploaded by

ayyazm
Copyright
© © All Rights Reserved
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Consolidated financial statements are the combined financial statements of a

company and all of its subsidiaries, divisions, or suborganizations.


How it works/Example:
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 $1 million, but the consolidated
number shows that the entity as a whole controls $213 million in assets.

In the real world, generally accepted accounting principles (GAAP) 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.
Why it Matters:
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.
GAAP dictates when and how statements should be consolidated, and whether
certain entities need to be consolidated. Companies who only own a minority
interest in an entity usually do not need toconsolidate them on their statements.
For example, if Company XYZ owned only 5% of Company A, it would not have to
consolidate Company A's financial statements with its own.

Companies commonly break out their consolidated statements by division or


subsidiary so investors can see the relative performance of each, but in many
cases this is not required, especially if the company owns 100% of the division or
subsidiary.

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