To make consolidated income statement is not difficult. But before this, you should understand the meaning of consolidated income statement. Consolidated income statement is important financial statement which is made by parent company in which it shows the result of his company and his subsidiary companies. For example A Ltd is the parent company and B Ltd is the subsidiary company. If A ltd joins his profit and loss account with the profit and loss account of B Ltd, then a new profit and loss account will become. This will be consolidated income statement. It is also called consolidated statements of operations or consolidated statements of earnings.
Now, we are ready to teach the steps to make consolidated income statement. Following are its main steps:
Now, we are ready to teach the steps to make consolidated income statement. Following are its main steps:
1st Step : Eliminate Internal Transfer of Stock
When stock is transferred from holding company to subsidiary company or reverse, at that time, we will eliminate this by following adjustment.
a) If goods are purchased by subsidiary company from holding company of $ 100,000
We will deduct $ 1,00,000 from the purchase of subsidiary company's purchase in the consolidated income statement. We also deduct $ 1,00,000 from the total sales of holding company in consolidated income statement.
b) If goods are sold by subsidiary company to holding company of $ 1,00,000
We will deduct $ 1,00,000 from sales of subsidiary company and purchase of holding company company.
2nd Step : Eliminate Common Expenses and Revenue
Because we have to show consolidated income statement for knowing net profit from the business outside from parent and subsidiary company. So, we will not show any revenue which have been gained from subsidiary or parent company. For example, parent company gets interest on given loan to subsidiary company, it will not show in consolidated income statement. Like this, we will not show the dividend on the shares purchased of subsidiary company in consolidated income statement. We also will not show the expenses which are incurred by holding company for subsidiary company or reverse.
3rd Step : Making of Reserve for Unrealized Profit on Unsold Stock
When any holding company sells the goods to its subsidiary company or reverse, we eliminate it on the basis of first step. But there will be still unsold goods in credit side consolidated trading and profit and loss account. It means there will be the profit margin of parent or subsidiary company in it. One party's sales will be second party's purchase. Unsold stock will be the part of this stock. So, we have to cancel this profit by creating reserve for unrealized profit on unsold stock. We will show this account in the debit side of consolidated income statement or consolidated trading and profit and loss account.
4th Step : Mix the Outside Incomes and expenses
For example, parent company paid salary to employees of $ 10000 and subsidiary company paid the salary to employees $ 5000. We will show the expense of total salary in consolidated income statement as $ 15000. Like this, we consolidate all outside both parties incomes.
5th Step: Calculate the Minority interest's Part of Net profit
We will also calculate the minority interest's part of net profit. For example minority interest are 1/5 in subsidiary company. Total net profit is $ 1,00,000. We have calculate the minority interest's net profit as $ 20,000. This $ 20,000 will be debited in the consolidated income statement.
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