When consolidating the income statement, we need to take each individual line item and apply the magic formula Investor + Investee +/- transaction effects = consolidated figure The same formula that we use of the balance sheet So if I was consolidating revenue, I would take the investor's revenue plus the investee's revenue plus any transaction effects What transaction effects might we get? Well firstly we only want to consolidate from the deal date Let's say we bought the target company in the last two months of the financial year Well that means that when I consolidate revenue, I want to take investor's 12 month revenue But then I only want to take the investee's (the targets) last 2 months revenue So my transaction effect is to workout this stub period We only include the post acquisition portion of the year Now what other items might we get? Well we may have extra interest expense on the deal debt We may have lost interest expense on retired debt and lost interest income on balance sheet cash used All of those interest effects are new because of the deal We may have revenue and/or cost synergies Because the two companies come together, maybe we can sell to each others customers Or maybe we can reduce our costs, maybe we've got two departments and we only need one We may have extra depreciation or extra amortization on PP&E and intangibles that have been stepped up They've gone up in value, then the depreciation and the amortization also have to increase And lastly, there's going to be a tax impact on each of the above If you've got new revenues or if you've got less COGS, or if you've got new depreciation. They're all going to affect tax