For example, let's assume that Northern Electric Power (NEP) is an electric utility with its stock traded on a stock exchange. NEP acquires all of the stock of Midwest Gas Corporation (MGC). Both NEP and MGC continue as separate legal entities. NEP is the parent company and MGC is the subsidiary company. Each of these corporations will continue to operate its respective business and each will issue its own financial statements. However, the investors and potential investors in NEP will find it helpful to see the financial results and the financial position of the economic entity (the combination of NEP and MGC) that they control.
The consolidated income statement of NEP will report all of the revenues that the economic entity earned from outside customers. (Since the sales of electricity from NEP to MGC and the sales of gas from MGC to NEP are not earned outside of the economic entity they are eliminated.) The consolidated income statement will also report all of the expenses that were incurred outside of the economic entity. (Since the purchases of electricity by MGC from NEP and the purchases of gas by NEP from MGC did not occur outside of the economic entity they are also eliminated.)
The consolidated balance sheet of NEP will report all of the cash, receivables, plant, etc. of the economic entity. It will also report all of the liabilities of the economic entity. (Amounts owed and receivable between NEP and MGC are eliminated in the consolidated balance sheet.)
This is a very brief overview of consolidated financial statements. It is a major topic within the university course and textbook entitled advanced accounting.
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