Consolidated financial statements are of paramount importance, primarily for management and corporate governance, as well as for other customers, as the data obtained from the consolidated financial statements is used to obtain a picture of the group's actual state. Therefore, this graduate thesis explains the concept of consolidated annual statements and the legislative framework which is the basis for the preparation of such statements. Also, through the example of the selected company X, the methods and procedures for the preparation of the consolidated financial statements from the parent and affiliate's individual statements are demonstrated. Consolidation of financial statements is a process that consists of a large number of operations, and the aim is to present the financial statements of group’s individual enterprises as one complete report. In order to achieve this goal, primary and secondary methods were used in the thesis. The primary research work included the consolidation process of balance sheet, profit and loss statement, statement of changes in equity and cash flow statement for 2011 based on the financial statements of the parent company X and affiliate Y. Also, the secondary sources were used through study of different databases, professional literature including International and Croatian Financial Reporting Standards and previously executed research. This paper presents the procedures and methods of consolidation, and at the end a joint financial report was prepared on the example of the chosen group (as if it were one economic entity). Given that this is a small group, the consolidated financial statements were made in accordance with the Croatian Financial Reporting Standards.