Consolidated Financial Statements

 Most of the major corporation finds it convenient foe economic, legal, tax or other reason to operate in parent-subsidiary relationships. When we speak of a large company, such as IBM or PepsiCo, we generally think of the parent company, not of its many subsidiaries. Potential investors, however, want a clear financial picture of the total economic entity. The main purpose of consolidated financial statement is to give such as view of the parent and subsidiary firms by treating them as if they were one company. On a consolidated balance sheet, the inventory account includes the inventory held by the parent and all its subsidiaries. Similarly, on the consolidated income statement, the sales account is the total revenue from sales by the parent and all its subsidiaries.  This overview helps management, stockholders and creditors of the parent company judge the company’s progress in meeting its goal. 

The purchase method of preparing consolidated financial statements combines similar accounts from the separate statements of the parent and the subsidiaries. Some accounts result from transactions between the parent and the subsidiary- for example, sales and purchases between two entities and debt owed by one of the entities to the other. It is not appropriate to include these accounts in the consolidated financial statements; the sales and purchases are only transfers between different parts of the business, and the payables and receivables do not represent amounts due to or receivable from outside parties. For this reason, it is important that certain eliminations be made.  These eliminations avoid the duplication of accounts and reflect the financial position and operations from the standpoint of the single entity.  Eliminations appear only on the work sheets used in preparing consolidated financial statement. They are never shown in the accounting records of either the parent or subsidiary.

Questionnaire:

• What is a consolidated financial statement? 
• Explain more about consolidated financial statements?