Efficient Steps to Prepare Consolidated Financial Statements- A Comprehensive Guide with Real-World Examples

How to Prepare Consolidation of Financial Statements with Examples

Preparing consolidation of financial statements is an essential task for any company that has subsidiaries. It involves combining the financial information of the parent company and its subsidiaries into a single set of financial statements. This process helps provide a more accurate and comprehensive view of the company’s financial position and performance. In this article, we will discuss the steps involved in preparing consolidation of financial statements with some examples to illustrate the process.

Step 1: Identify the Parent and Subsidiary Companies

The first step in preparing consolidation of financial statements is to identify the parent and subsidiary companies. The parent company is the company that owns more than 50% of the voting shares of the subsidiary company. The subsidiary company is the company that is owned by the parent company.

For example, let’s consider a parent company called ABC Corporation, which owns 80% of the voting shares of XYZ Company. In this case, ABC Corporation is the parent company, and XYZ Company is the subsidiary company.

Step 2: Gather Financial Statements

Once the parent and subsidiary companies have been identified, the next step is to gather the financial statements of both companies. This includes the balance sheets, income statements, and cash flow statements.

For example, ABC Corporation and XYZ Company have prepared their financial statements for the year ended December 31, 2021. These financial statements are necessary for the consolidation process.

Step 3: Eliminate Intercompany Transactions

Intercompany transactions are transactions between the parent and subsidiary companies. These transactions need to be eliminated in the consolidation process to avoid double-counting.

For example, ABC Corporation sold $100,000 worth of goods to XYZ Company during the year. This transaction needs to be eliminated in the consolidation process because it is an intercompany transaction.

Step 4: Adjust for Non-controlling Interest

Non-controlling interest refers to the ownership interest in a subsidiary that is not owned by the parent company. Adjustments need to be made for non-controlling interest in the consolidation process.

For example, XYZ Company has 20% non-controlling interest. The consolidated financial statements will reflect the 80% ownership by ABC Corporation and the 20% ownership by non-controlling interest.

Step 5: Combine Financial Information

After eliminating intercompany transactions and adjusting for non-controlling interest, the next step is to combine the financial information of the parent and subsidiary companies.

For example, ABC Corporation’s net income for the year is $500,000, and XYZ Company’s net income is $300,000. The consolidated net income will be $800,000 ($500,000 + $300,000).

Step 6: Prepare Consolidated Financial Statements

The final step is to prepare the consolidated financial statements, which include the consolidated balance sheet, consolidated income statement, and consolidated cash flow statement.

For example, the consolidated balance sheet will show the total assets, liabilities, and equity of ABC Corporation and XYZ Company combined. The consolidated income statement will show the combined net income of both companies, and the consolidated cash flow statement will show the combined cash flow of both companies.

In conclusion, preparing consolidation of financial statements is a complex process that requires careful attention to detail. By following the steps outlined in this article, companies can ensure that their consolidated financial statements are accurate and comprehensive.