However, since a central management controls the parent and its subsidiaries and they are related to each other, the parent company usually must prepare one set of financial statements.
These statements, called consolidated statements, consolidate the parent’s financial statement amounts with its subsidiaries’ and show the parent and its subsidiaries as a single enterprise.
In the consolidated report, the transactions among subsidiaries or a subsidiary and a parent company are eliminated to avoid double counting.
The financial statement reflects the financial results for all the entities it bought as well as the original assets of the company.
After a stock acquisition by the parent company, the subsidiary continues to maintain separate accounting records.
The smaller companies can help the profitability of the parent company while also continuing to operate as separate entities.
Each subsidiary must prepare its own financial statements including balance sheet, income statement, statement of cash flows and statement of retained earnings.
Consolidated financial statements are the "Financial statements of a group in which the assets, liabilities, equity, income, expenses and cash flows of the parent (company) and its subsidiaries are presented as those of a single economic entity", according to International Accounting Standard 27 "Consolidated and separate financial statements", and International Financial Reporting Standard 10 "Consolidated financial statements".
Most major corporations comprise numerous companies bought along the way to create their empires.The purpose of such acquisitions ranges from ensuring a source of raw materials (such as oil), to desiring to enter into a new industry, or seeking income on the investment.Both corporations remain separate legal entities, regardless of the investment purpose.Sledge (now a “subsidiary” of Premier the “parent”) will continue to operate and maintain its own legal existence. Even though it is a separate legal entity, it is viewed by accountants as part of a larger “economic entity.” The intertwining of ownership means that Parent and Sub are “one” as it relates to economic performance and outcomes.According to GAAP (Generally Accepted Accounting Principles), parent companies must prepare consolidated financial statements to report on the financial well-being of both the parent company and all its subsidiaries.This information for each subsidiary is then combined using consolidation software to create consolidated financial reports that represent the financial position of the parent company.