How to Read, Analyze and Interpret Consolidated Financial Statements

Consolidated financial statements are the combined reporting of a parent company and its subsidiaries. These statements are merged together to provide an overview of the entire organization, rather than separate reporting for each entity. Readers of consolidated financial statements should be able to analyze and interpret these documents with ease. But some may find them challenging due to their complexity. If you need assistance in understanding consolidated financial statements, continue reading for helpful tips. Readers of any set of financial statements should be able to answer a few questions about that document: What is the primary purpose of this document? Who is the intended audience? What is the scope? What type of information is included? Are there any special circumstances that might impact the contents?

Consolidated Balance Sheet

Unlike a standalone balance sheet, a consolidated balance sheet does not show the parent company’s complete assets and liabilities. Instead, it simply shows a consolidation of the parent company’s assets and liabilities and those of its subsidiaries. This is because the parent company and its subsidiaries are considered one economic unit. As a result, a consolidated balance sheet only shows the entire unit at one point in time. Assets – The consolidated balance sheet includes all of the parent company’s and subsidiaries’ assets. This gives investors a view of the complete assets of the organization. Liabilities – The consolidated balance sheet includes all of the parent company’s and subsidiaries’ liabilities. This gives investors a complete view of the organization’s liabilities. The following graphic illustrates the difference between a consolidated balance sheet and standalone balance sheets.

Consolidated Income Statement

A consolidated income statement shows the revenues, expenses, and earnings of the entire organization. This differs from the standalone income statement, which shows the operations of just one company. Even though it includes the earnings of the parent company and all subsidiaries, it is not the same as the income statement of just the parent company. The consolidated income statement includes the revenues, expenses, and earnings of the parent company and all subsidiaries as if they were one company. Revenues – The consolidated income statement includes the revenues of the parent company and all subsidiaries. Expenses – The consolidated income statement includes all expenses of the parent company and all subsidiaries. Earnings – The consolidated income statement includes all earnings, or profits, of the parent company and all subsidiaries. The following graphic illustrates the difference between a consolidated income statement and standalone income statements.

Consolidated Statement of Changes in Equity

The consolidated statement of changes in equity shows a parent company’s equity and the equity of its subsidiaries. This differs from a standalone statement of changes in equity, which shows the parent company’s equity and equity of only the parent company. The consolidated statement of changes in equity includes two sections: Parent Company Equity – The parent company equity section includes the organization’s common equity, preferred equity, and retained earnings. These numbers are the same as the standalone parent company statement of changes in equity. Subsidiary Equity – The equity section of the consolidated statement of changes in equity includes the organization’s equity in each subsidiary and the subsidiary’s debt. These numbers are the same as the equity section of the standalone statement of changes in equity.

Analyze The Consolidated Balance Sheet

The first section of a consolidated balance sheet is the parent company’s assets. The parent company’s assets are followed by the subsidiaries’ assets. Assets – The parent company’s assets are listed first. These are followed by the assets of all subsidiaries. Liabilities – The parent company’s liabilities are listed first. These are followed by the liabilities of all subsidiaries. Shareholder’s Equity – The shareholder’s equity section of the consolidated balance sheet includes two sections: parent company equity and subsidiary equity. The following graphic illustrates the consolidated balance sheet, including parent company and subsidiary assets and liabilities.

Analyze The Consolidated Income Statement

The first section of a consolidated income statement is the revenues of the parent company. These are followed by the revenues of all subsidiaries. Revenues – The parent company’s revenues are listed first. These are followed by the revenues of all subsidiaries. Expenses – The parent company’s expenses are listed first. These are followed by the expenses of all subsidiaries. Earnings – The consolidated income statement includes total earnings for the parent company and all subsidiaries. The following graphic illustrates the consolidated income statement.

Analyze The Consolidated Change In Equity

The consolidated statement of changes in equity starts with the parent company’s equity, followed by the equity of all subsidiaries. Parent Company Equity – The parent company equity section includes the organization’s common equity, preferred equity, and retained earnings. Subsidiary Equity – The equity section of the consolidated statement of changes in equity includes the organization’s equity in each subsidiary and the subsidiary’s debt. The following graphic illustrates the consolidated statement of changes in equity.

Key Takeaway

Consolidated financial statements are the combined reporting of a parent company and its subsidiaries. Investors can use these statements to see the complete picture of the organization. The consolidated balance sheet shows the parent company’s assets and liabilities and those of all subsidiaries. The consolidated income statement shows the revenues, expenses, and earnings of the entire organization. The consolidated change in equity shows the parent company’s equity and equity of all subsidiaries. Consolidated financial statements are often challenging for readers due to their complexity. Reading and analyzing these statements requires a different approach than reading standalone statements. By understanding the purpose, audience, and contents of these statements, you can better understand them.

Related Course: Financial Modeling Skills Course