Consolidation Principles
Expert-defined terms from the Advanced Certificate in Consolidation Reporting (United Kingdom) course at London School of Business and Administration. Free to read, free to share, paired with a professional course.
Accounting Equation is a fundamental concept in financial accounting that… #
It is calculated as Assets = Liabilities + Equity. Related terms include balance sheet and financial statements. The accounting equation is essential in preparing consolidated financial statements, as it ensures that the financial position of the parent company and its subsidiaries is accurately reflected.
Accounting Policies refer to the specific accounting methods and procedur… #
In consolidation reporting, accounting policies must be consistent across all entities within the group to ensure accurate and reliable financial information. Related terms include GAAP and IFRS. For instance, a company may adopt a policy of valuing inventory at the lower of cost or net realizable value, which must be applied consistently across all subsidiaries.
Accumulated Depreciation is the total depreciation expense accumulated ov… #
It represents the decrease in value of an asset due to wear and tear, obsolescence, or other factors. Related terms include depreciation and amortization. For example, a company may have a piece of equipment with an original cost of £10,000 and an accumulated depreciation of £3,000, resulting in a net book value of £7,000.
Amortization is the process of allocating the cost of an intangible asset … #
It is similar to depreciation, but applies to intangible assets such as patents, copyrights, and goodwill. Related terms include depreciation and impairment. For instance, a company may have a patent with a cost of £50,000 and a useful life of 10 years, resulting in an annual amortization expense of £5,000.
Asset is a resource owned or controlled by a company, expected to generate futur… #
Assets can be tangible, such as property, plant, and equipment, or intangible, such as patents and goodwill. Related terms include liability and equity. For example, a company may have a building with a cost of £100,000 and a net book value of £80,000, which is classified as a tangible asset.
Associated Company is a company in which another company has a significant influ… #
This is typically the case when one company owns between 20% and 50% of the voting power of the other company. Related terms include subsidiary and joint venture. For instance, a company may have a 30% stake in another company, giving it significant influence but not control.
Capital Expenditure is an expense incurred to acquire or improve a long #
term asset, such as property, plant, and equipment, and is a critical component in preparing the consolidated cash flow statement. It is typically capitalized and depreciated over the life of the asset. Related terms include operating expense and revenue expenditure. For example, a company may incur a capital expenditure of £50,000 to purchase a new machine, which is capitalized and depreciated over 5 years.
Cash Flow Statement is a financial statement that shows the inflows and o… #
It is used to assess a company's liquidity and solvency. Related terms include balance sheet and income statement. For instance, a company may have a cash inflow of £100,000 from operating activities and a cash outflow of £50,000 from investing activities.
Consolidated Financial Statements are financial statements that combine t… #
They provide a comprehensive picture of the group's financial position and performance. Related terms include parent company and subsidiary. For example, a parent company may have a subsidiary that is 80% owned, and the consolidated financial statements will reflect the financial information of both the parent and subsidiary.
Consolidation is the process of combining the financial statements of a p… #
It involves eliminating intragroup transactions and accounting for the parent company's investment in its subsidiaries. Related terms include parent company and subsidiary. For instance, a parent company may have a subsidiary that is 100% owned, and the consolidation process will eliminate all intragroup transactions between the two entities.
Control is the ability of a parent company to direct the financial and operat… #
This is typically the case when one company owns more than 50% of the voting power of the other company. Related terms include significant influence and joint control. For example, a company may have a 60% stake in another company, giving it control over the subsidiary's financial and operating policies.
Cost of Goods Sold is the direct cost of producing the goods or services sold by… #
It includes the cost of materials, labor, and overheads. Related terms include gross profit and operating expense. For instance, a company may have a cost of goods sold of £50,000 and a gross profit of £20,000, resulting in a gross margin of 40%.
Current Asset is an asset that is expected to be converted into cash within one… #
Examples include cash, accounts receivable, and inventory. Related terms include non-current asset and current liability. For example, a company may have a current asset of £100,000, consisting of £50,000 in cash and £50,000 in accounts receivable.
Current Liability is a liability that is expected to be settled within one year… #
Examples include accounts payable, accrued expenses, and short-term loans. Related terms include non-current liability and current asset. For instance, a company may have a current liability of £50,000, consisting of £20,000 in accounts payable and £30,000 in accrued expenses.
Depreciation is the process of allocating the cost of a tangible asset ov… #
It represents the decrease in value of an asset due to wear and tear, obsolescence, or other factors. Related terms include amortization and impairment. For example, a company may have a piece of equipment with an original cost of £10,000 and a useful life of 5 years, resulting in an annual depreciation expense of £2,000.
Dividend is a distribution of a portion of a company's profit to its shar… #
It can be paid in cash or in the form of additional shares. Related terms include retained earnings and dividend yield. For example, a company may declare a dividend of £0.50 per share, resulting in a total dividend payment of £50,000.