Describe the process of preparing a consolidated financial statement for a parent company with subsidiaries, considering intercompany transactions and minority interests.

Preparing consolidated financial statements for a parent company with subsidiaries involves a comprehensive process that eliminates intercompany transactions and accounts for minority interests. Here's a detailed explanation:

1. Identifying Subsidiaries: The first step is to identify all entities controlled by the parent company. Control is typically defined as having the power to govern the financial and operating policies of another entity, usually through majority ownership or other means of control.

2. Determining the Consolidation Date: This is the date on which the financial statements of the parent and subsidiaries are combined. It's usually the year-end of the parent company.

3. Eliminating Intercompany Transactions: Intercompany transactions, such as sales, purchases, and loans between subsidiaries, are eliminated from the consolidated statements to avoid double-counting. This is done by:
- Removing intercompany sales and purchases: This eliminates revenue and cost of goods sold that are not realized externally.
- Adjusting for unrealized profits: If a subsidiary sold goods to the parent company at a profit, the unrealized profit is eliminated. This prevents the parent company from recognizing profit on its own inventory.
- Adjusting for intercompany debt: Intercompany debt is eliminated from the consolidated balance sheet, as it represents an internal transaction.

4. Consolidating Financial Statements: After eliminating intercompany transactions, the financial statements of the parent and subsidiaries are combined. This typically involves adding up corresponding line items from the individual financial statements.

5. Accounting for Minority Interests: If a subsidiary is not wholly owned by the parent company, the non-controlling interest (minority interest) needs to be accounted for in the consolidated financial statements. This represents the portion of the subsidiary's net income and equity that belongs to the minority shareholders. It is typically presented as a separate line item on the consolidated statement of comprehensive income and the consolidated balance sheet.

Examples:

Eliminating Intercompany Sales: If a subsidiary sells goods to the parent company for $100,000 and the subsidiary has a 20% profit margin, the consolidated financial statements will eliminate $20,000 (20% of $100,000) of unrealized profit.
Accounting for Minority Interest: If a subsidiary has net income of $100,000 and the parent owns 80% of the subsidiary, the minority interest will be $20,000 (20% of $100,000). This will be reported as a separate line item on the consolidated statement of comprehensive income.

In conclusion: Consolidating financial statements for a parent company with subsidiaries is a complex process that requires careful consideration of intercompany transactions and minority interests. By eliminating internal transactions and accurately accounting for minority ownership, the consolidated financial statements provide a true representation of the combined financial performance and position of the entire group.