A:

A subsidiary is a company that is controlled by another 'parent' company. The subsidiary acts and operates like its own entity but it still is connected with the larger company. When there is majority ownership or control, the investor corporation guides the resources, business policies and operating decisions of the subsidiary.

Financial statements are prepared the same for the subsidiary as they are for the parent company. However, in addition, consolidated balance sheets are prepared. This is the combined financials statements of the parent company and all of its subsidiaries. The consolidated financial statements give a valuable overview of how well the entire corporation is being managed and are useful in valuing the company as a whole. On the balance sheets, the shares owned by outsiders are shown on the balance sheet as an item. The consolidated balance sheet also includes foreign subsidiaries. However, it is sometimes difficult to convert the financial statements of a foreign subsidiary back into the parent company's currency.

When a company is listed on the stock exchange, the information found on the financial statements is consolidated. The true value of a company cannot be properly accounted for if all the parts are not brought together. The decisions and quality of management offered from the parent company affect the subsidiary, therefore making it crucial that one also has knowledge of the parent company when analyzing a subsidiary.

For further reading, see Reading The Balance Sheet, Breaking Down The Balance Sheet and What You Need To Know About Financial Statements.

RELATED FAQS
  1. What is the difference between a subsidiary and a wholly owned subsidiary?

    Understand the primary differences between a subsidiary company and a wholly owned subsidiary, and their relationship to ... Read Answer >>
  2. What is the difference between a subsidiary and a sister company?

    Discover the differences between subsidiary companies and sister companies, and understand how both are related to parent ... Read Answer >>
  3. Are there any practical differences between a wholly owned subsidiary and a regular ...

    Explore the real, practical differences between a wholly owned subsidiary and a regular subsidiary. Local conditions determine ... Read Answer >>
  4. How do wholly owned subsidiaries operate in the European Union?

    Find out how wholly owned subsidiaries and their parent companies are treated in the European Union, specifically regarding ... Read Answer >>
  5. How is taxation treated for both the parent and subsidiary company during a spinoff?

    Learn how the potential tax implications of a spinoff can affect both parent and subsidiary companies and how taxes may be ... Read Answer >>
  6. What are the differences between affiliate, associate and subsidiary companies?

    All three of these terms refer to the degree of ownership that a parent company holds in another company. In most cases, ... Read Answer >>
Related Articles
  1. Small Business

    What's a Subsidiary?

    A subsidiary is a corporation owned 50% or more by another corporation. The owning corporation is usually called the parent or holding company. A company that is 100% owned and controlled by ...
  2. Small Business

    What is a Wholly Owned Subsidiary?

    A company whose common stock is 100% owned by another company, called the parent company.
  3. Investing

    Sneaky Subsidiary Tricks Can Cloud Financials

    Use consolidated financial statements to uncover a parent company's true performance.
  4. Small Business

    Explaining Affiliate, Associate And Subsidiary

    Affiliate, associate and subsidiary are all terms referring to the degree of ownership a parent company holds in another company.
  5. Small Business

    Understanding Consolidated Financial Statements

    Consolidated financial statements are the combined financial statements of a parent company and its subsidiaries.
  6. Investing

    How To Calculate Minority Interest

    Minority interest calculations require the use of minority shareholders’ percentage ownership of a subsidiary, after controlling interest is acquired.
  7. Taxes

    What's a Holding Company?

    A holding company is a corporation that owns enough voting stock in another company to control its management and policies.
  8. Investing

    Off-Balance-Sheet Entities: An Introduction

    The theory and practice of these entities varies greatly. Investors need to learn what they're getting into.
  9. Investing

    12 Things You Need To Know About Financial Statements

    Discover how to keep score of companies to increase your chances of choosing a winner.
  10. Investing

    Reading The Balance Sheet

    Learn about the components of the statement of financial position and how they relate to each other.
RELATED TERMS
  1. Consolidated Financial Statements

    The combined financial statements of a parent company and its ...
  2. Subsidiary

    A company whose voting stock is more than 50% controlled by another ...
  3. Unconsolidated Subsidiary

    A company that is owned by a parent company, but whose individual ...
  4. Wholly Owned Subsidiary

    A company whose common stock is 100% owned by another company, ...
  5. Parent Company

    A company that controls other companies by owning an influential ...
  6. Downstream Guarantee

    A guarantee placed on a loan on behalf of the borrowing party ...
Hot Definitions
  1. Cash Flow

    The net amount of cash and cash-equivalents moving into and out of a business. Positive cash flow indicates that a company's ...
  2. PLUS Loan

    A low-cost student loan offered to parents of students currently enrolled in post-secondary education. With a PLUS Loan, ...
  3. Graduate Record Examination - GRE

    A standardized exam used to measure one's aptitude for abstract thinking in the areas of analytical writing, mathematics ...
  4. Graduate Management Admission Test - GMAT

    A standardized test intended to measure a test taker's aptitude in mathematics and the English language. The GMAT is most ...
  5. Magna Cum Laude

    An academic level of distinction used by educational institutions to signify an academic degree which was received "with ...
  6. Cover Letter

    A written document submitted with a job application explaining the applicant's credentials and interest in the open position. ...
Trading Center