What are consolidated financial statements?

Consolidated financial statements are the financial statements of a group of entities that are presented as being those of a single economic entity. The definitions are:

• A group is a parent entity and all of its subsidiaries
• A subsidiary is an entity that is controlled by a parent company

Thus, consolidated financial statements are the combined financials for a parent company and its subsidiaries.

These statements require considerable effort to construct, since they must exclude the impact of any transactions between the entities being report on. Thus, if there is a sale of goods between the subsidiaries of a parent company, this intercompany sale must be eliminated from the consolidated financial statements. Another common intercompany elimination is when the parent company pays interest income to the subsidiaries whose cash it is using to make investments; this interest income must be eliminated from the consolidated financial statements.

Consolidated financial statements are useful for reviewing the financial position and results of an entire group of commonly-owned businesses. Otherwise, reviewing the results of individual businesses within the group does not give an indication of the financial health of the group as a whole.

As an example of consolidation, ABC International has $5,000,000 of revenues and $3,000,000 of assets appearing in its own financial statements. However, ABC also controls five subsidiaries, which in turn have revenues of $50,000,000 and assets of $82,000,000. Clearly, it would be extremely misleading to show the financial statements of just the parent company, when its consolidated results reveal that it is really a $55 million company that controls $85 million of assets.

Related Topics

Balance sheet overview 
Income statement overview 
Retained earnings statement 
Statement of cash flows overview 
What are financial statement footnotes?