Consolidation is the presentation as one economic entity of the financial statements of a parent and subsidiary subsequent to the date of acquisition. A corporation which owns more than 50% of the common stock of another corporation is known as a parent company. A company that is majority owned by another corporation is known as a subsidiary. The parent controls election of the subsidiary’s board of directors and therefore all company activities, through exercise of voting rights associated with its majority stock ownership. In effect, parent and subsidiary companies operate as one entity controlled by directors of the parent company.
Since a parent company and its subsidiaries are separate legal entities, separate financial statements are prepared for each company. In the separate financial statements for the parent company, subsidiaries appear only as investments. In recognition of the fact that parent and subsidiaries function as one entity, consolidated financial statements are also prepared. In consolidated financial statements, assets, liabilities, revenue, and expenses of two or more separate corporations are combined in a single set of financial statements.
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