How to Create Consolidated Financial Statements

Introduction

Consolidated financial statements are financial statements that combine the financial information of a parent company with its subsidiaries. A parent company is an entity that owns more than 50% of the voting shares of another entity, also known as a subsidiary. The purpose of preparing consolidated financial statements is to provide an accurate representation of the financial position and performance of the parent company and its subsidiaries as a single economic unit. Consolidated financial statements are used by stakeholders such as investors, creditors, and regulators to assess the financial health of the parent company and its subsidiaries.

Steps Involved in Creating Consolidated Financial Statements

Creating consolidated financial statements involves several steps, which include gathering financial reports from all subsidiaries, identifying and adjusting any intercompany transactions, adjusting the subsidiary financial statements to reflect parent company accounting policies, and combining the adjusted subsidiary financial statements into a single set of consolidated financial statements.

Step 1: Gather Financial Reports from All Subsidiaries

The first step in creating consolidated financial statements is to gather financial reports from all subsidiaries. Financial reports typically include the income statement, balance sheet, statement of cash flows, and notes to the financial statements. These documents should be collected from each subsidiary and reviewed to ensure accuracy.

Step 2: Identify and Adjust Any Intercompany Transactions

The second step in creating consolidated financial statements is to identify and adjust any intercompany transactions. Intercompany transactions refer to transactions between the parent company and its subsidiaries. These transactions must be identified and adjusted in order to eliminate any double counting of assets and liabilities when preparing the consolidated financial statements.

Step 3: Adjust the Subsidiary Financial Statements to Reflect Parent Company Accounting Policies

The third step in creating consolidated financial statements is to adjust the subsidiary financial statements to reflect the parent company’s accounting policies. This includes ensuring that all subsidiaries are using the same accounting principles and practices as the parent company. This is done to ensure consistency across the consolidated financial statements.

Step 4: Combine the Adjusted Subsidiary Financial Statements into a Single Set of Consolidated Financial Statements

The fourth step in creating consolidated financial statements is to combine the adjusted subsidiary financial statements into a single set of consolidated financial statements. This process involves combining the income statements, balance sheets, statements of cash flows, and notes to the financial statements of each subsidiary into a single set of consolidated financial statements.

Different Approaches to Consolidating Financial Statements

There are several different approaches to consolidating financial statements, including proportional consolidation, equity method of consolidation, and partial ownership consolidation. Proportional consolidation involves combining the financial information of the parent company and its subsidiaries on a proportionate basis. The equity method of consolidation involves combining the financial information of the parent company and its subsidiaries based on the parent company’s ownership interest in the subsidiaries. Partial ownership consolidation is used when the parent company does not have a majority ownership interest in the subsidiaries.

Using Accounting Software to Create Consolidated Financial Statements

Accounting software can be used to create consolidated financial statements. The process involves entering the financial information from each subsidiary into the accounting software, adjusting the financial information to reflect the parent company’s accounting policies, and then combining the adjusted financial information into a single set of consolidated financial statements. An illustrative example of how to use accounting software to create consolidated financial statements is provided below.

Overview of How to Use Accounting Software to Create Consolidated Financial Statements

The first step in using accounting software to create consolidated financial statements is to enter the financial information from each subsidiary into the accounting software. This includes entering the income statement, balance sheet, statement of cash flows, and notes to the financial statements. Once the financial information has been entered into the accounting software, it must be adjusted to reflect the parent company’s accounting policies.

Illustrative Example of How to Use Accounting Software to Create Consolidated Financial Statements

For example, assume a parent company has two subsidiaries. The first step is to enter the financial information from both subsidiaries into the accounting software. Then, the financial information from both subsidiaries must be adjusted to reflect the parent company’s accounting policies. Finally, the adjusted financial information from both subsidiaries can be combined into a single set of consolidated financial statements.

Best Practices for Preparing Consolidated Financial Statements

When preparing consolidated financial statements, there are several best practices to follow. First, it is important to ensure the accuracy of the data used in the preparation of consolidated financial statements. This includes verifying the accuracy of the financial information from each subsidiary and adjusting any intercompany transactions. Second, accepted accounting principles and practices should be followed when preparing consolidated financial statements. This ensures that the financial information is presented in a consistent manner. Finally, changes in the consolidated financial statements should be monitored and analyzed to identify potential issues.

Conclusion

Creating consolidated financial statements involves several steps, including gathering financial reports from all subsidiaries, identifying and adjusting any intercompany transactions, adjusting the subsidiary financial statements to reflect parent company accounting policies, and combining the adjusted subsidiary financial statements into a single set of consolidated financial statements. Different approaches to consolidating financial statements exist, and accounting software can be used to create consolidated financial statements. Best practices for preparing consolidated financial statements include ensuring the accuracy of the data used, following accepted accounting principles and practices, and monitoring and analyzing changes in the consolidated financial statements.