They are often presented for companies that have one or more subsidiaries to show an overview of the entire operation.During the consolidation process under generally accepted accounting principles, activity between the companies disappears.Consolidated financial statements can give readers a misguided sense of profitability and financial stability in the absence of non-consolidated information.When income statements are brought together and reported on a consolidated basis, the revenues, expenses and net profit are presented as combined figures.For example, the current ratio is current assets divided by current liabilities.This ratio tells investors how well the company will be able to pay its near-term obligations.A parent's investment in its subsidiary would be removed along with the matching equity on the subsidiary's books.Any inter-company sales would be erased as would the related cost of goods sold on the subsidiary's income statement.
Each annual edition focuses primarily on new requirements with mandatory application for preparers with periods beginning on or after 1 January of that year.
For example, on a consolidated income statement a corporation having several subsidiaries would report the total of all of its companies' sales that were made to customers outside of its group.
(Sales to companies within its group of related companies would be excluded as well as the purchases within its group.) A consolidated balance sheet would report the combined assets except for claims against companies within its group.
Consolidating financial statements for parent and subsidiary companies or related companies can provide investors and other interested parties with a comprehensive overview of the financial operations of the entities.
However, some detail gets lost during the consolidation process that can result in misleading presentation.