What Is a Projected Consolidated Income Statement?

A projected consolidated income statement helps corporate leadership answer important questions of interpretation and analysis. Senior executives review the report to understand how the company would fare if it buys another business, the additional revenue the combined entity would reap, customer goodwill that the acquired company is bringing to the table, and the competitive clout the parent company would wield after consolidation.

Financial Consolidation

Financial consolidation enables a company to include the performance results of its affiliates in its financial statements. The business does not consolidate data if it owns less than 50 percent equity in another company. If the stake is less than 20 percent, the investing company uses the cost method. If the business owns between 20 and 50 percent, it uses the equity method. This mandates that the investing corporation reduce its equity amount when the investee declares losses and pays dividends and increasing it when the investee posts net income.

Income Statement

An incomes statement is also known as a statement of profit and loss, statement of income or P&L. It incorporates a company's revenues, expenses and net income -- or loss, if the business made less money than it spent over a period.

Projected Consolidated Income Statement

Accountants prepare a projected, or pro forma, consolidated profit and loss statement by assuming various equity scenarios and relying on management's conjectures. They factor in the assumed equity stake, accounting rules in effect, the investee's performance data and elimination entry requirements. These prevent the double-counting of revenue and expense data between a parent company and its affiliates -- items that financial managers call intercompany events.

Example

Company A -- a Minnesota-based insurance company -- wants to buy equity stakes of 60 percent and 37 percent in company B and company C, respectively. Top leadership asks that accountants prepare a consolidated income statement based on projected data and management's assumptions. Company A's stand-alone revenues and expenses would amount to $100 million and $60 million, respectively. Company B, which is on an exceptionally rosy growth path, could post net income of $25 million at the end of the year. The organization might generate $5 million from intercompany sales. Company C could declare revenues and expenses of $20 million and $15 million, respectively. It also might remit $1 million in dividends to shareholders. To prepare company A's pro forma consolidated income statement, accountants first clarify a few points. Company C's information would not qualify for consolidation, as company A's equity stake is less than 50 percent. However, accountants would record $370,000, or $1 million times 37 percent, in dividend receipts. Company B's stand-alone income would be $20 million -- that is, $25 million minus $5 million in intercompany sales. Consequently, company A's pro forma consolidated revenues amount to $112 million --- $100 million plus $20 million times 60 percent --- and its projected combined net income equals $52 million, or $112 million minus $60 million.