What Is the Meaning Of Consolidated Statement & Its Importance

What Is the Meaning Of Consolidated Statement & Its Importance

5-6 minutes

Consolidated Statement Definition

The consolidated statement, also known as the ""consolidated financial statement,"" is a single company''s, a few companies'', or a few divisions'' financial statement. The statement contains helpful information to get an idea regarding the financial performance of the company or the group of companies.

A crucial factor of operating a successful enterprise involves keeping essential monetary reports. These reports enable the firm to have a recording of its cash inflows and outflows as well as taking steps to project their future cash flows. A consolidated financial statement will help the company that has several divisions or subsidiaries or any other entity of that kind to keep the record of all accounting activities without having an overwhelming volume of thousands of different types of reports.

To the uninitiated, what should be explained herein is what exactly consolidated financial statements are and how they differ from combined financial statements.

Understanding Consolidated Statement Meaning

A combined financial statement is a financial report that shows how the money is being made by a business through its parent and subsidiary companies.

A ""parent company"" is typically a company that oversees another company while also possibly having some stake in the ownership of that company.

For example, many food brands will use the same name business to make their products unique. Suppose your business name is The Mega Soda Company, and that name might be the ""parent"" of a couple of different soda brands you own.

Difference Between Consolidated and Combined Statements

There are some people who confuse the consolidated statements with combined statements since both present the net income that a parent business and its subsidiaries have generated. However, they do so in different manners:

• Consolidated Statements: Treat the parent business and its subsidiaries as though they were one.
• Combined Statements: Reflect finance-related data of the parent company and its subsidiaries separately, although on the same statement.

In consolidated financial statements, there is no differentiating the performance between the parent company and any subsidiaries. In fact, they are represented as one specific entity and their financial situation.

Why Use Consolidated Financial Statements?

A financial statement can help a business figure out what its costs are and how much money it''s making. It may also be useful for filing taxes. An example of this is that some businesses utilize consolidated financial accounts, which treat a parent company and its subsidiaries as one, in order to get tax breaks or lower tax rates because of financial activities or losses.

Investors also find consolidated financial records very useful. Potential investors want to know as much as possible about a company before they decide to invest their money with the company of their choice. In order to do that, ideally, they need a consolidated financial statement, showing what the business and its companies are using the buyers'' money for. Normally, each company files its financial statements. However, buyers may request to view a consolidated financial statement in order to save some time.

When Is a Consolidated Financial Statement Used?

Sometimes a parent company needs to present a combined financial statement and sometimes it doesn''t. A private company doesn''t have to disclose as much about its finances as a public company—for tax and pride reasons.

FAQs

1. What is a consolidated statement in finance? Consolidated statements of a business with more than one division depict its overall general health, including the parent company and all its controlled subsidiaries. There are mainly three basic forms of financial statements: statements of income, cash flow, and financial situation.
2. Why do organizations prepare consolidated statements? The consolidated financial statements reflect the financial health of a corporation from a business point of view. It reveals information that finance journalists, shareholders, investors, lenders, and management teams all deserve to know.
3. What financial reports are included in a consolidated statement? A consolidated financial statement does not typically stop with the consolidated balance sheet and the consolidated statement of profit and loss; rather, it gives some form of note, other statements, and information explanation. The consolidated cash flow statement is prepared if the parent company issues a separate statement on cash flow.
4. Explain how financial statements are consolidated. When you consolidate, the assets, debts, and other financial items of two or more companies are put together into one. The word “consolidate” is often used in financial accounting to mean putting together a set of financial statements where all the subsidiaries report to the parent business.
5. When are consolidated statements usually produced? Every year, firms decide on submitting consolidated financial accounts with their subsidiaries or not. In most cases, they usually do so to save money in taxes or in some other way.

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