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How do you create a cash flow statement for a corporation with multiple subsidiaries?

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A cash flow statement is a financial report that shows how a corporation generates and uses cash from its operating, investing, and financing activities. It is an essential tool for understanding the liquidity and solvency of a business, as well as its ability to fund its growth and pay dividends. However, preparing a cash flow statement for a corporation with multiple subsidiaries can be challenging, as it requires consolidating the cash flows of all the entities under the parent company's control. In this article, we will explain how to create a cash flow statement for a corporation with multiple subsidiaries, using a simplified example and the indirect method.

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Muhammad Anas Amin

Finance Manager | Financial Controller | CFO | Expert in Accounting, Reporting, Statements, Budgets & Analysis | VAT &…
Tomi Akinwale ACCA, ACA, ACTI, B.TECH, FMVA, AAT.

Tax | Financial Reporting | Deloitte | Writer
Lea Pongos

Accountant/ Bookkeeper/QuickBooks Certified/ Xero Certified Expert

1 Identify the subsidiaries

The first step is to identify the subsidiaries that belong to the corporation. A subsidiary is a company that is more than 50% owned by another company, which is called the parent company. The parent company has the power to influence the management and financial decisions of the subsidiary, and therefore must report its financial performance as part of the consolidated financial statements. To identify the subsidiaries, you need to look at the ownership structure of the corporation, and determine which companies are controlled by the parent company, either directly or indirectly.

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Muhammad Anas Amin

Finance Manager | Financial Controller | CFO | Expert in Accounting, Reporting, Statements, Budgets & Analysis | VAT & Corp. Tax Specialist | External Audit | FP&A | Financial Modeling | Work. Capital Manager | Power BI
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First, I gather the individual cash flow statements from each subsidiary, ensuring we're on the same reporting periods and sorting out currency conversions if needed. Then, I eliminate any intercompany transactions to give a clear view of external cash flows. If there are subsidiaries using different currencies, I carefully convert their cash flows into the corporation's reporting currency using the correct exchange rates. I also make adjustments for any non-controlling interests to show their share of subsidiary profits. After all this, the consolidated cash flow statement brings together the operating, investing, and financing activities of all subsidiaries, with detailed disclosures for clarity.

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Lea Pongos

Accountant/ Bookkeeper/QuickBooks Certified/ Xero Certified Expert
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By consolidating, identifying, determining,calculating, preparing, providing and analyzing cash flows of the company.With this, you can create an accurate cash flow statement that reflects the cash flow position of the corporation.

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Muhammad Zaurez Afshar

FCMA, CGMA
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This involves identifying all companies within the group and listing them. It's crucial to gather information on each subsidiary to ensure all relevant cash flows are captured for consolidation purposes.

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Richa Khatter

Adding Values via Financial Management, Planning & Analysis
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Cash flow of entity with multiple Subsidiaries can be created based on following parameters 1. List the subsidiaries 2. Check status based on following parameters a. Domestic/Foreign b. Ind AS/IGAAP/IFRS/US GAAP etc compliant 3. Make adjustments a. Inter company Adjustment b. Non controlling interest C. Restatement of monetary or non monetary items if foreign subsiiary d. Adjustments as per respective GAAP 4. Consolidate the group entities Keep reading, Stay blessed

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2 Eliminate intercompany transactions

The next step is to eliminate any intercompany transactions that occur between the parent company and its subsidiaries, or among the subsidiaries themselves. Intercompany transactions are transactions that involve the exchange of goods, services, or cash between entities that are part of the same corporation. These transactions do not affect the cash flow of the corporation as a whole, and therefore must be eliminated to avoid double-counting or inflating the cash flow figures. For example, if the parent company sells inventory to a subsidiary, this transaction is not a source of cash for the parent company, nor a use of cash for the subsidiary, as it is merely a transfer of assets within the corporation. To eliminate intercompany transactions, you need to identify and subtract them from the cash flow statement of each entity.

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Tomi Akinwale ACCA, ACA, ACTI, B.TECH, FMVA, AAT.

Tax | Financial Reporting | Deloitte | Writer
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Intercompany transactions must be eliminated and zeroed. There has to be an holistic analysis and review of all such data includinggoods in transit in order to eliminate them.

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3 Adjust for non-controlling interests

The third step is to adjust for any non-controlling interests that exist in the subsidiaries. A non-controlling interest is the portion of equity that is owned by shareholders other than the parent company in a subsidiary. A non-controlling interest represents a claim on the cash flows and assets of the subsidiary that is not attributable to the parent company. Therefore, when preparing a consolidated cash flow statement, you need to adjust for the amount of cash flows that are distributed to or received from the non-controlling shareholders. For example, if a subsidiary pays dividends to its non-controlling shareholders, this is a use of cash for the subsidiary, but not for the parent company, and therefore must be deducted from the consolidated cash flow statement. To adjust for non-controlling interests, you need to identify and add or subtract them from the cash flow statement of each subsidiary.

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4 Combine the cash flows

The final step is to combine the cash flows of the parent company and its subsidiaries, after eliminating intercompany transactions and adjusting for non-controlling interests. This will result in a consolidated cash flow statement that reflects the cash flows of the corporation as a single economic entity. The consolidated cash flow statement will have three sections: cash flows from operating activities, cash flows from investing activities, and cash flows from financing activities. Each section will show the net amount of cash that is generated or used by the corporation from its core business operations, its investments in long-term assets, and its borrowings and repayments of debt and equity. To combine the cash flows, you need to add up the cash flows of each entity in each section, and present them in a standard format.

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Fola A.

Achieve profitability and financial stability through strategic financial planning | FCCA, CPA | Revenue Growth | Financial Management | Operational Efficiency → Cost Optimization → Team Leadership
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There is the need to also consider the reporting currency when combining ghe cash flow of the parent company and its subsidiaries into one if the cash flow was originally reported in different countries currency. There is the need to first translate each entity's cashflow currency to the parents company currency using an agreed ruling rate before this is combined to show as a single entity.

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5 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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Michael Dennis

Author of "Credit & Collection Handbook." "Credit and Collection Manager's Concise Desk Reference." "Customer Profit Hacking" "Happy Customers, Faster Cash" "Credit & Collection Forms and Procedures Manual"
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In my experience, the single biggest challenge in generating a consolidated cash flow statement for a company with multiple subsidiaries is reconciling and consolidating cash flow data from diverse operating entities with potentially different accounting systems, currencies, and reporting periods.

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Dale Padayachee

Commercial and Financial Executive
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Remember if multiple currencies, for me the main challenge will be analyzing the translation separately when doing cash flow. This is always forgotten as the FCTR is a balancing figure to a whole wad of accounts.

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How do you create a cash flow statement for a corporation with multiple subsidiaries?

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1 Identify the subsidiaries

2 Eliminate intercompany transactions

3 Adjust for non-controlling interests

4 Combine the cash flows

5 Here’s what else to consider

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