What do consolidated financial statements combine under GAAP?

• A. Only the financial results of the parent company
• B. The financial results of a parent company and its subsidiaries
• C. Quarterly earnings reports
• D. The cash flows from operating activities

Answer: (B)

Consolidated financial statements provide a comprehensive view of a company's overall financial health by combining the financial results of a parent company with those of its subsidiaries. Under GAAP, this consolidation reflects the economic realities of a corporate structure where the parent company exerts control over its subsidiaries, effectively treating them as a single entity for financial reporting purposes.

This approach ensures that stakeholders, such as investors and creditors, receive a full picture of the financial performance and position of the entire group of companies, rather than an incomplete view limited to just the parent company. By combining the financial statements, consolidated reports incorporate all revenues, expenses, assets, liabilities, and equity, which may give a more accurate assessment of the organization’s overall financial status and operational results.

The other options do not encompass the full scope of what consolidated financial statements represent, highlighting why this choice is the definitive one. For example, only presenting the financial results of the parent company would omit critical information regarding the subsidiaries. Quarters' earnings reports and cash flows from operating activities are components of financial analysis but do not encompass the collective financial position that consolidated statements reveal.