Purpose of Consolidated Income Returns

Financial statements are official reports that contain specific information on a company's financial position. Consolidated financial reports allow individuals to have a better understanding of a company's financial health and its subsidiaries.

Defined

National accounting standards typically have strict requirements for how a company should report financial information. For example, a company that owns less than 50 percent of another business can report ownership as an equity investment on the financial statement. Ownership above 50 percent requires the financial information from subsidiaries be consolidated into the parent company's financial statement.

Purpose

Consolidated financial statements provide a better picture of a company's financial health. Although the parent company may be healthy, its subsidiaries may cause the parent company financial strain. These statements give business stakeholders a better picture of companies owned by the parent company.

Significance

Companies find it difficult to hide poor financial performance when using consolidated financial statements. A few of the major accounting scandals in 2001-2002 occurred when companies used subsidiaries to hide business losses, misleading investors about the company.

References

• Investopedia: Consolidated Financial Statements
• Business Dictionary: Consolidated Financial Statement