Consolidated Income Statement : all you need to know
A consolidated income statement offers significant insights for business owners and managers of large enterprises. It summarizes total sales revenue and expenses over a specific period, be it a financial cycle or the fiscal year. While not essential for all businesses, understanding this statement, its components, and its significance can be beneficial for owners. Familiarizing oneself with what goes into a consolidated income statement and its importance is valuable.
What is a consolidated income statement?
Consolidated financial statements are usually created for any type of enterprise that has a number of different subsidiaries or business divisions. There are three main types of consolidated financial statements:
- The consolidated balance sheet
- The consolidated cash flow statement
- The consolidated income statement
A consolidated income statement is often referred to as an income statement, a consolidated statement of earnings, a consolidated statement of income, a statement of operations or a profit and loss statement. While this document has a number of different names, it has just one main purpose: to show how a business has been performing throughout a certain period of time.
A consolidated income statement can be created to cover an entire fiscal year or an accounting cycle. Some businesses opt to create a consolidated income statement once every quarter.
Usually, a consolidated income statement will provide details on a business’s net income, the gains that it has made as well as any losses it has accrued throughout the accounting period. It will provide information on the number of earnings per share and outline how the net income is distributed amongst equity shareholders and other stakeholders.
Are consolidated financial statements a legal requirement?
In the UK, it is a legal requirement under the Companies Act 2006 that all medium to large-sized business entities must produce consolidated financial statements, including the consolidated income statement. These consolidated financial statements must be produced at the end of the financial year.
What constitutes a medium to large company? In simple terms, if a company has control of another company, then it must produce consolidated statements. Control is defined as when one company owns 50 per cent of the outstanding common voting stock of another entity.
Small companies and consolidated financial statements
The Companies Act 2006 states that small companies are not required to produce consolidated financial statements. To qualify for this exemption, a company must meet the below conditions:
- The aggregate turnover of the company must not exceed £6.5 million net or £7.8 million gross
- The aggregate average number of employees of the company must not be more than 50
- The aggregate balance sheet total for the business should not exceed £3.26 million net or £3.9 million gross
Exemptions for subsidiaries
If the financial detail of a subsidiary is deemed to be not necessary to provide a fair and true picture of the parent company’s financial situation, it may be excluded from the consolidated financial statements. Subsidiaries can also be excluded if they meet the below conditions:
- The interest the parent company holds in the subsidiary is held purely for resale purposes
- Gathering the financial information required to create consolidated financial statements would incur highly disproportionate costs or result in long delays in returning tax reports
- There are long-term restrictions that stop the company from exerting its rights over the subsidiary’s assets or over the management of the subsidiary
These regulations also apply equally to any overseas subsidiaries. If the parent company is registered in the UK, it must adhere to the rules as outlined in the Companies Act 2006 and include all UK-based and overseas subsidiaries in its consolidated financial statements.
How to prepare a consolidated income statement
Consolidated income statements must be prepared in accordance with the International Financial Reporting Standards (IFRS). These regulations were introduced in 2001 and replaced the previous rules laid out by the International Accounting Standards (IAS) Regulations. Both standards were created by the International Accounting Standards Board (IASB), which is an independent accounting body based in London.
The UK and the European Union both follow standards as set by IFRS as do China and Japan. The United States, however, requires companies to use standards outlined under the Generally Accepted Accounting Standards (GAAP). This is crucial information to bear in mind if you require a consolidated income statement that includes overseas subsidiaries.
Because of the complexity of rules surrounding the creation of a consolidated income statement, business owners and managers usually employ the services of a certified accountant. A professional accountant who specialises in business accounting can produce an accurate financial statement that complies with all relevant legislation and regulations.
What Consolidated Income Statement Includes ?
In essence, the consolidated income statement provides a list of all revenue generated by a business and its subsidiaries as well as all expenses incurred during a certain time period. The consolidated income statement will include items such as:
- All revenue generated during the designated time period
- The total cost of sales
- The gross profit of the business
- The operating expenses of the business and its subsidiaries
- All operating profits of the business
- Any income derived from continuing or discontinued operations
- The net income of the business as a whole
- Information on all taxes that the business is obliged to pay
Types of Consolidated Income Statement
The precise details of these categories can vary, depending on the nature and scope of the particular business entity and its subsidiaries. Some companies choose to create a single-step income statement which provides subtotals for the gross profit and the operating expenses. Other companies prefer to create a multistep income statement which places similar items into groups to create subtotals.
In both methods, the consolidated income statement will end with the total amount of the business’s net income. If the company has shares, the income statement will also provide details on earnings per share.
How a consolidated income statement can benefit your business
As well as being a legal requirement for businesses of a certain size, a consolidated income statement can provide valuable data on the financial state of an entity.
An analysis of the consolidated income statement can provide information that assists business owners in determining how their company is growing. Owners can see quickly what the current rate of growth is and what the potential for future growth may be. This is also crucial information for investors as it allows them to assess whether a business is a good investment risk or not.
Creating a consolidated income statement requires accurate information on both the income generated by a business and all of its expenses. Smart business leaders make sure that they use every tool available to them to streamline their accounting processes. Many companies use the Mooncard payment system to track their expenditures.
With the Mooncard payment card, all an employee has to do is take a digital photo of a receipt once they have made a purchase on behalf of the company. The receipt is then used to automatically generate an expense report from prefilled details. The report is then sent directly to your accounting department. This process makes collecting information on expenses simple and instantaneous. If you would like to see how the Mooncard solution works in practice, visit the website to arrange a free, no-obligation online demonstration.