Definition of Consolidated Financial Statements
Consolidated financial statements are financial statements for a group of separate legal entities that are controlled by one company (the parent company). The consolidated financial statements report the financial results of the entire group’s transactions with people and companies outside of the group.
Most of the financial statements of large corporations with shares of stock trading on a stock exchanges appear to be consolidated financial statements.
Example of Consolidated Financial Statements
Assume NEP is an electric utility with its common stock trading 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 a subsidiary company. Each of these corporations 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 results of operations and the financial position of the group of companies (also referred to as the economic entity) consisting of the combination of NEP and MGC.
The consolidated income statement of NEP will report all of the revenues that the group of companies 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 group of companies, those sales are eliminated when NEP’s and MGC’s income statements are combined to become the consolidated income statement.) The consolidated income statement will also report all the expenses that were incurred outside of the group of companies. (Since the purchases of electricity by MGC from NEP and the purchases of gas by NEP from MGC did not occur outside of the group of companies, these purchases are also eliminated.)
The consolidated balance sheet of NEP will report all of the cash, receivables, plant, etc. of the group of companies (the economic entity). It will also report all of the liabilities of the economic entity. (The amounts payable and receivable between NEP and MGC are eliminated in the consolidated balance sheet.)
This is a very brief overview of consolidated financial statements. “Consolidations” is a major topic within the university course and textbook entitled Advanced Accounting.
