Definition: A set of consolidated financial statements consists of reports that show the operations, cash flows, and financial position of a parent company and all subsidiaries. In other words, it’s a report that combines all the activities of a parent company and its subsidiaries on one report.
What Does Consolidated Financial Statements Mean?
You can think of it like a merger that combines all the subsidiaries with the parent company to make one larger entity that issues a single set of financial statements.
This process is accomplished by using the equity method of accounting where the parent company reports the income and business activities of the subsidiaries in its own accounts. Since the companies are going to be combined on the financials, no investment accounts are needed, as this would double count the subsidiaries in the reports. This might sound a little complicated at first, so I’ll break it down into steps.
In order to combine the companies’ financial statements together, we must first get rid of any accounts that would be double counted. For instance, the parent company maintains an investment account that records the amount of money invested in each subsidiary. This account is no longer needed on a set of consolidated financial statements because we are treating all of the companies as if they were the one company.
So first, the investment accounts must be disregarded. Second, the individual assets and liabilities of the parent and subsidiaries are combined to make a single balance sheet. Third, the revenue and expenses are combined to make a single income statement. Fourth, cash flow activities are also combined for all entities to form a single statement of cash flows.
As you can see, it’s almost like we combined all the entities into one and disregarded any existing intercompany accounts that were on the books of the individual companies.
External users can use this report to see the profitability and growth of the company as a whole including all of the subsidiaries.