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MANG3003: FINANCIAL ACCOUNTING 3
LECTURE: 5
BY: ERICA YUAN

CONSOLIDATED INCOME STATEMENT
PRINCIPLES
1) Single entity concept applied
2) From revenue to profit for the year include all of P’s income and expenses PLUS all of S’s
income and expenses
3) Transactions between group members should be eliminated
4) After profit for year show split of profit between amounts attributable to the parent’s
shareholders and the non-controlling interest

ADJUSTMENTS TO EXPENSES
1) Sales and Purchases
- Intra group trading must be eliminated from Consolidated Income Statement (CIS)
- Consolidated Revenue = P’s Revenue + S’s Revenue – Intra Group Sales
- Consolidated Cost of Sales = P’s COS + S’s COS – Intra Group Sales
- Sales and Cost of Sales should only include goods sold to a third party
TOTAL INTER COMPANY SALES
DEBIT (DR) - SALES
CREDIT (CR) - COST OF SALES
UNREALISED PROFIT (URP)
DEBIT (DR) - COST OF SALES
CREDIT (CR) - STOCK

-

Adjustment for URP should be shown as an increase to cost of sales (return inventory
back to original cost to group and eliminate URP

EXAMPLE 1: ADJUSTMENTS TO SALES
During the year P had sold £84,000 worth of goods to S
...
At the end
of the year, S still had £36,000 worth of these goods in inventories
...

- Must be removed from CIS
- Depreciation charge must be adjusted so that it is based on the cost of the asset to the
group
3) Impairment of goodwill
- Charge for the year will be passed through CIS
- If NCI have been valued at fair value, a portion of the impairment expense must be
removed from NCI share of profit
4) Fair Values
- If non-current asset of S has been revalued when calculating goodwill, this will result in
an adjustment to the CIS
- CIS must include a depreciation charge based on the fair value of the asset
- Extra depreciation must therefore be calculated and charged to an appropriate cost
category (based on the question requirements)
5) Interest
- Any loan interest received or paid between the group must be eliminated from CIS
6) Dividends
- Dividend payment by S to P will need to be cancelled
- Any dividend income shown in the CIS must arise from investments other than those in S

MANG3003: FINANCIAL ACCOUNTING 3
LECTURE: 5
BY: ERICA YUAN
EXAMPLE 2: CONSOLIDATED INCOME STATEMENT
Below are the draft income statements of Paris and its subsidiary company London for the year
ended 31st December 2011
...
5 million on 31st December 2007 for 80% of London’s 800,000 ordinary shares
...
A further impairment of
£40,000 was found to be necessary at the year end
...

3) Paris made sales to London at a selling price of £600,000 during the year
...
The profit element included in London’s
closing inventory was £30,000
...
All depreciation should be
charged to cost of sales
...

6) Paris values the non-controlling interest using fair value method
...

1) GROUP STRUCTURE
- PARIS: 80%
- NCI: 20%
2) NCI
NCI SHARE OF PROFIT AFTER TAX
(20% X 400)
LESS: NCI SHARE OF IMPAIRMENT
(20% X 40,000)
NCI SHARE OF DEPRECIAITION
(20% X 10,000)

80,000
(8,000)
(2,000)
70,000

MANG3003: FINANCIAL ACCOUNTING 3
LECTURE: 5
BY: ERICA YUAN
WORKINGS:
1) Revenue
- (3,200 + 2,560 – 600 [inter co sales])
2) Cost of Sales
- (2,200 + 1,480 – 600[inter co purchases] + 30 [URP] + 10 [Depreciation])
3) Distribution Cost
(160 + 120)
4) Administration Cost
(400 + 80 + 40 [impairment])
5) Tax
- (400 + 480)
CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31ST DECEMBER 2011
REVENUE
COST OF SALES
GROSS PROFIT

£’000
5,160
(3,120)
2,040

INVESTMENT INCOME (EXTERNAL SOURCE
ONLY):
DISTRIBUTION COST
ADMINISTRATIVE EXPENSES
PROFIT BEFORE TAX

(280)
(520)
1,240

TAXATION
PROFIT FOR THE YEAR

(880)
360

ATTRIBUTABLE TO:
EQUITY HOLDER (BALANCING FIGURE)
NON – CONTROLLING INTEREST

MID – YEAR ACQUISITIONS
1)
2)
3)
4)

Apportion income and expenses between pre and post-acquisition periods
Apportion on actual basis if possible
Revenue and expenses accrue evenly over the year
If actual basis not possible then use time basis

290
70
360

MANG3003: FINANCIAL ACCOUNTING 3
LECTURE: 5
BY: ERICA YUAN
EXAMPLE 3: MID – YEAR ACQUISITIONS

Required: Prepare the consolidated income statement for the year ended 31st March 2012
1) GROUP STRUCTURE
- ETHOS: 75%
- NCI: 25%
- ACQUISITION DATE: 30TH NOVEMBER 2011
- REPORTING DATE: 31ST MARCH 2012 (4 months only)
2) NCI
- NCI Share of Profit after Tax
- (32,800 x 4/12) x 25%
- = 2,733
WORKINGS:
1) Revenue
- [303,600 + (217, 700 x 4/12)]
2) Cost of Sales
[143,800 + (102,200 x4/12)]
3) Operating Expenses
[71,200 + (51,300 x 4/12)]
4) Investment Income
- [2,800 + (1,200 x 4/12)]
5) Taxation
- [46,200 + (32,600 x 4/12)]

MANG3003: FINANCIAL ACCOUNTING 3
LECTURE: 5
BY: ERICA YUAN
CONSOLIDATED INCOME STATEMENT FOR THE YEAR ENDED 31ST MARCH 2012

REVENUE
COST OF SALES
GROSS PROFIT

£’000
376,167
(177,867)
198,300

OPERATING EXPENSES
PROFIT FROM OPERATIONS

(88,300)
110,000

INVESTMENT INCOME
PROFIT BEFORE TAX

3,200
113,200

TAXATION
PROFIT FOR THE YEAR

(57,067)
56,133

LIMITATIONS OF GROUP ACCOUNTS
1)
2)
3)
4)

Not a legal entity
Group profits not available for distribution to parent shareholders
Losses may be hidden
Aggregation obscures useful information



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