Consolidation - Intercompany Transactions

Flashcards covering key vocabulary and concepts related to consolidation and intercompany transactions.

Consolidated Statements

Financial statements prepared to show the financial position and operations of two or more affiliated companies as if they are one business.

Intercompany Profit in Inventory Transfer

Calculated by multiplying the inventory held by the buying affiliate (acquired from the selling affiliate) by the gross profit rate based on sales of the selling affiliate.

Eliminating Entries

Entries used to remove the revenue and expenses related to intercompany transfers recorded by individual companies, ensuring only the historical cost of inventory on hand is included in the consolidated Statement of Financial Position.

Intercompany Sales at Cost

Merchandise sold to related affiliates at the seller’s cost, requiring no inventory adjustments for consolidation when resold to outsiders.

Intercompany Sales at a Profit or Loss

Sales of inventory to affiliates that are marked up by a certain percentage based on cost, requiring elimination processes in consolidated statements.

Downstream Intercompany Sales

Sales made by a parent company to its subsidiaries; profits are realized when inventory is resold to outsiders.

Upstream Intercompany Sales

Sales from subsidiaries to the parent company; consolidation process is similar to downstream sales, but unrealized profit is apportioned to controlling and non-controlling interests.

Unrealized Intercompany Profit

Profit arising from intercompany sales that has not been confirmed by resale of the inventory to outsiders; must be eliminated from the consolidated statement of financial position.

Realized Profit in Beginning Inventory

Intercompany profit in the purchaser’s beginning inventories that is realized through sales of merchandise to outsiders during the following period.

Non-Controlling Interest (NCI)

Considered part of the consolidated stockholder’s equity; their share in intercompany profits in inventories is considered not realized.

Sale of Property, Plant, and Equipment (PPE)

Differs from merchandise sales due to the unusual nature of the transactions and the long useful lives of PPE, requiring consideration over many accounting periods.

Non-Depreciable PPE

Requires eliminations in consolidated financial statements as long as the assets are held by the acquiring company; example: land.

Depreciable PPE

Unrealized intercompany gains are realized gradually over the asset's remaining life; depreciation must be based on the asset's original cost for consolidation purposes.

Elimination of Unrealized Gains and Losses

Eliminated against the interests of those shareholders who recognized the gains or losses; the direction of the sale determines which shareholder absorbs the elimination.

Subsequent Disposition

Unrealized intercompany gain on the sale of assets is realized when the assets are resold to outsiders; the gain reported by the consolidated entity is based on the cost of the asset to the consolidated entity.