Your financial statements are the written records showing the financial health and performance of your business. Financial statements typically include:
Both small businesses and large corporations need to have financial statements, though publicly traded corporations are required to publish them. All businesses need them for tax purposes, and while small businesses need to show them to lenders in order to prove they can pay back the loan, large corporations post them to show investors the status of their investment and the financial conditions of the company.
For business owners that operate several different businesses or corporations with multiple subsidiaries, there are two ways of looking at the data: consolidated financial statements or combined financial statements. Our CPA is breaking down the difference to help you know which one to look at when investing.
A consolidated financial statement takes the income statement, balance sheets, and cash flow statements and any other data that’s needed, of a company plus all of its subsidiaries, divisions, or sub-organizations.
For example, PepsiCo owns Pepsi, and the brands Sierra Mist and Mountain Dew are a part of Pepsi. Additionally, they own Frito-Lay, Quaker, Tropicana, and Naked Juice along with several smaller subsidiaries. If they put forth a consolidated financial statement, it would be a comprehensive look at just PepsiCo with all the smaller companies within PepsiCo added together in the statements.
It may sound confusing to have three large financial statements that take a comprehensive look at all of the holdings. After all, it doesn’t tell you if Frito-Lay is thriving or if Tropicana is losing money hand over fist, and isn’t that important?
Yes and no. It’s important to PepsiCo and the heads of the subsidiaries, but to investors, their investment is solely in PepsiCo. By consolidating the statements, investors and lenders get a clear view of how the corporation as a whole is performing and if they are a safe investment.
Combined financial statements show the individual results of each subsidiary of the parent company. Going back to PepsiCo, they would publish a Pepsi statement, then Frito-Lay, Tropicana, Quaker, and Naked Juice would all have their own financial statements. The statements are typically all published concurrently, but they are broken down by subsidiary.
While investors and lenders can see an aggregate of the health of the company in a consolidated statement, the combined financial statements allow the investor to see the financial health of each individual operation. On both the combined and consolidated statements, inter-company transactions are eliminated. For example, if PepsiCo loans money to Frito-Lay or takes in royalties from Tropicana, those transactions are not included to prevent double counting and misrepresenting transactions.
While we are primarily focusing on large corporations, small businesses may also need combined and consolidated financial statements. If you have an LLC or have incorporated your small business, your financial statements must be shown to creditors, lenders, and to the IRS with your tax returns. If you have multiple businesses, like a plumbing company and a plumbing supply shop, and they operate under the same LLC or corporation, you’ll need consolidated or combined financial statements.
We have a team of experienced CPAs who work with small business owners in Raleigh, providing a variety of accounting and bookkeeping services, including financial statement generation. If you want to ensure accurate statements for all of your holdings, reach out to us today at (919) 420-0092 or fill out our contact form!