Consolidated financial statements present the financial position of the parent and its subsidiaries as if they were a single entity. Which of the following is typically true in consolidation?

• A. Intercompany transactions are not eliminated
• B. Intercompany transactions and balances are eliminated
• C. Only the parent's accounts are shown
• D. Only subsidiaries' accounts are shown

Answer: (B)

Consolidating the group as a single economic entity requires removing internal activity so the statements reflect only external interactions. Intercompany transactions between members—such as sales, loans, or service charges—and the related intercompany balances are eliminated. This also neutralizes any unrealized profits that might exist on goods still held within the group, like inventory bought from one member by another. By doing this, revenues, expenses, assets, and liabilities represent the outside world, not internal transfers. Part of the process is also to remove the parent’s investment in subsidiaries against the subsidiaries’ equity, with non-controlling interest recognized if applicable, so the consolidated balance sheet shows the group’s net position. That’s why intercompany transactions and balances are eliminated in consolidation.