Financial statements are vital for businesses, from international corporations down to limited liability companies. These statements give investors an in-depth, accurate picture of a business’s financial strength and help the company make important decisions to help the business grow.
When companies consist of multiple businesses, it is important to determine whether to prepare a consolidated or combined financial statement detailing each company’s earnings, profits, losses and more. Such an endeavor can be a complex and confusing process, and CPAs are crucial for companies as they work to create accurate statements for investors, shareholders, decision-makers and other relevant parties. Here are some things to know about consolidated and combined financial statements.
Financial statements
Financial statements are vital for any kind of business. They give an accurate look at the financial health of the business, including assets, liabilities, income and other aspects of a business’s finances. Financial statements should include a balance sheet, income statement, equity and cash flow statement. Financial statements are necessary for businesses of any size.
Combined and consolidated financial statements come into play when there are multiple companies involved. A parent company and its subsidiaries will need to determine whether a consolidated or combined statement is best.
Consolidated statements
In a consolidated financial statement, the financial results of the parent company and all its subsidiaries will be reported together in one statement. A company may choose to use this statement if there are tax advantages to bringing the financials together. A CPA can determine each year whether a company will benefit using a consolidated statement. Profits and losses, liabilities and charitable contributions of the varying subsidiaries may be more beneficial for the company as a whole one year. The next year, it may be best to keep them separate due to tax credit limitations.
A consolidated statement may be used by either private or public companies. However, public companies are subject to different requirements under GAAP. In most cases, a public company that has ownership of at least 50% of the subsidiary’s voting shares must use a consolidated statement. A public company like PepsiCo will use consolidated financial statements for PepsiCo Beverages, Frito-Lay, Quaker Foods and its other major brands. This consolidated statement gives investors a good look at the financial health of PepsiCo as a whole.
Combined statements
If a parent company is not required to use a consolidated financial statement, it may choose to use a combined statement. A combined statement includes separate financial statements for the parent company itself and each of its subsidiaries. These statements will show the financial health of each individual company. Although each subsidiary would have its own financial statement, these statements would be prepared in the same way as a consolidated statement. In both consolidated and combined statements, financial transactions between companies are not reported.
Preparing an accurate statement
From large corporations to smaller LLCs, providing accurate financial statements is critical for investors, auditors and taxes. Having the right technology at your disposal can make preparing even the most complex statements easier and less time consuming. With the help of cloud technology, automation and tools like visual reporting software, prebuilt and custom templates can automatically create extensive, easy-to-understand reports.
Consolidated and combined financial statements are all about telling a company’s financial story, and the right tools will help eliminate confusion and present the story accurately. Whether the target audience is an investor or an auditor, it is easy for voluminous data to become overwhelming, and the big picture can get lost. A visual report can make it easier to spot trends and highlight relevant data points.
Combined and consolidated financial statements can be complicated, and having an expert CPA prepare them is essential. Each year, CPAs can determine which kind of statement works best for the business or which is required. Using cloud and visual reporting technology, knowledgeable CPAs can be an invaluable asset in preparing monthly, quarterly and yearly financial statements.