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.

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RELATED TERMS
  1. Subsidiary

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