Consolidated Balance Sheet – Representing the Assets and Liabilities of the Parent Company and the Subsidiaries
For the purpose of financial reporting, many companies present their financial information along with that of their subsidiaries, in the form of a consolidated balance sheet. This presents a complete financial picture of the parent company and its subsidiaries.
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Consolidated Balance Sheet - Presenting an Inclusive View
A company that holds more than 50% stake in another company is called a parent company and the other is called a subsidiary company. In many countries, as per regulatory requirements, the parent company must present a consolidated balance sheet
detailing its financial details along with those of its subsidiaries. This gives a clear view of the company’s financial health and is a requirement under Generally Accepted Accounting Principles (GAAP). Many large companies prepare individual balance sheets for their subsidiaries as well as the consolidated balance sheet. The consolidated balance sheet reveals the value of the company’s assets and the debts it owes, whereas the individual balance sheets give financial information of the subsidiary companies and the value they create for the parent company.
Balance Sheet Items - Assets and Liabilities
The balance sheet items
include the company’s assets, its liabilities and the shareholders’ equity (including the retained earnings). It is important to note that in a consolidated balance sheet, all inter-company transactions (transactions between the parent and subsidiaries or those between subsidiaries) are eliminated. This is necessary since such transactions do not create wealth, but merely moves resources from one company to another. The balance sheet items comprise the combined assets of the parent company and its subsidiaries, including cash, inventories and accounts receivables. The combined liabilities such as accounts payable, corporate bonds issued, tax liabilities etc. are listed as well. Finally, the shareholders’ equity (issued capital) of the parent company is also added on the liabilities side. Issued capital of subsidiaries is not included as it is already accounted for under the parent company’s equity. The assets and liabilities sides must balance.
Projected Balance Sheet - an Estimate
A projected balance sheet provides an estimation of the expected assets, liabilities, and shareholders’ equities at the end of the accounting period. This is an important management tool as it provides an advance indication of the company’s financial health and highlights problems, if any. This helps management to take corrective action early on, rather than wait till the end of the accounting period and be confronted with problems. This estimation also helps accountants verify the mathematical accuracy of the financial statements before the final balance sheet is prepared. Through such estimation, the company can also calculate approximately the resources required in the near future as well as the imminent obligations.