Chapter 6 - Elimination of unrealized profit on intercompany sales of inventory. In this chapter, we’ll look at the effects of intercompany sales of merchandise on the consolidated statements. As we learned earlier, many business combinations involve a company buying its supplier or customer – vertical integration. | Elimination of Unrealized Profit on Intercompany Sales of Inventory 1 Learning Objectives Describe the financial reporting objectives for intercompany sales of inventory. Determine the amount of intercompany profit, if any, to be eliminated from the consolidated statements. Understand the concept of eliminating 100% of intercompany profit not realized in transactions with outsiders, and know the authoritative position. Distinguish between upstream and downstream sales of inventory. Compute the noncontrolling interest in consolidated net income for upstream and downstream sales, when not all the inventory has been sold to outsiders. Prepare consolidated workpapers for firms with upstream and downstream sales using the cost, partial equity, and complete equity methods. Discuss the treatment of intercompany profit earned prior to the parent-subsidiary affiliation. 2 Upstream and Downstream Sales of Inventory 3 LO 4 Upstream and downstream sales. Company P Company S2 P sells inventory Downstream S2 sells inventory Upstream S1 sells inventory Horizontal Company S1 Consolidated Entity Profit (loss) that has not been realized through subsequent sales to third parties is defined as unrealized intercompany profit (loss) and must be eliminated in the preparation of consolidated financial statements. LO 1 Financial reporting objectives for intercompany sales. Effects of Intercompany Sales of Merchandise on the Determination of Consolidated Balances The financial reporting objectives are: Consolidated sales include only sales with parties outside the affiliated group. Consolidated cost of sales includes only the cost to the affiliated group of goods that have been sold to parties outside the affiliated group. Consolidated inventory on the balance sheet is recorded at its cost to the affiliated group. 4 Objective is to eliminate the effects of intercompany sales as if they had never occurred. Intercompany Sales of Merchandise Determination of Consolidated Sales, Cost of Sales, | Elimination of Unrealized Profit on Intercompany Sales of Inventory 1 Learning Objectives Describe the financial reporting objectives for intercompany sales of inventory. Determine the amount of intercompany profit, if any, to be eliminated from the consolidated statements. Understand the concept of eliminating 100% of intercompany profit not realized in transactions with outsiders, and know the authoritative position. Distinguish between upstream and downstream sales of inventory. Compute the noncontrolling interest in consolidated net income for upstream and downstream sales, when not all the inventory has been sold to outsiders. Prepare consolidated workpapers for firms with upstream and downstream sales using the cost, partial equity, and complete equity methods. Discuss the treatment of intercompany profit earned prior to the parent-subsidiary affiliation. 2 Upstream and Downstream Sales of Inventory 3 LO 4 Upstream and downstream sales. Company P Company S2 P sells inventory .
