Ch. 6: Elimination of Unrealized Profit of Intercompany Sales Of Inventory

Downstream Sales

Sales from a parent company to one or more of its subsidiaries

Upstream Sales

Sales from subsidiaries to the parent company

• controlling and the noncontrolling interests would have needed to be adjusted to reflect their interest in the amount of unrealized intercompany profit eliminated

Horizontal Sales

Sales from one subsidiary to another subsidiary

Affiliated Group

A parent and all subsidiaries for which consolidated financial statements are prepared

• alternatively, this group may be referred to as the economic entity or as the consolidated entity

Unrealized Intercompany Profit or Loss

Profit (loss) that has not been realized from the point of view of the consolidated entity through subsequent sales to third parties

• Must be eliminated in preparation of consolidated financial statements

  • Profit or loss should not be reported until the inventory or other assets acquired by the purchasing affiliate have been used during the course of operations or sold to parties outside the affiliated group (third parties)

Markup

When Gross Profit is stated as a percentage of cost

• Gross Profit divided by COGS

100% Total Elimination

the entire amount of unconfirmed intercompany profit is eliminated from consolidated net income and the related asset balance

Consolidated Net Income

The Parent company's income from its independent operations that has been realized in transactions with third parties plus (minus) subsidiary income (loss) that has been realized in transactions with third parties plus or minus adjustments for the period relating to the depreciation, amortization, and impairment of differences between implied and book values.

Consolidated retained Earnings

The parent company's cost basis retained earnings that has been realized in transactions with third parties plus (minus) the parent company's share of the increase (decrease) in subsidiary retained earnings that has been realized in transactions with third parties from the date of acquisition to the current date plus or minus the cumulative effect of adjustments to date relating to the amortization, depreciation, and impairment of differences between implied and book values.