Why must inventory transfers to related companies be eliminated in preparing consolidated financial statement?
Concept Introduction:
Consolidated financial statements:
Consolidated financial statements are prepared by a parent company to consolidate the assets and liabilities of the parent and its subsidiaries.
To Indicate the reason for the elimination of inventory transfers to related companies while preparing the consolidated financial statements.
Explanation of Solution
A consolidated balance sheet shows the combined balances of the parent company and its subsidiaries. On the balance sheet of the parent company, all the assets of the subsidiary are added with the assets of the parent company. The intercompany transactions are eliminated from the consolidated financial statement because it will create an unnecessary financial recording. Hence, the intercompany inventory transactions are also eliminated while preparing the consolidated financial statements.
Want to see more full solutions like this?
Chapter 6 Solutions
Advanced Financial Accounting
- How does the inventory method chosen can have a significant effect on the amount of income reported by the company to external parties?arrow_forwardWhy is continuity assumption,separate entity assumption and cost principle so important for statement of financial position reporting?arrow_forwardWhat are the different methods of inventory valuation, and how do they impact a company's financial statements?arrow_forward
- How does the timing of revenue recognition impact a company's financial statements and profitability?arrow_forwardHow is inventory management a balancing act between stock- out costs and holding costs?arrow_forwardWhat is the controlling interest percentage for a consolidated accounting financial statement?arrow_forward
- What happens when the ending inventory is misstated (over- and understated specifically) and how it affects the corporate financials?arrow_forwardExplain how the revenue recognition principle supports the elimination of intercompany transactions when preparing consolidated financial statementsarrow_forwardShort answer: Define a 'responsibility' in accordance with the Conceptual Framework's explanation, using examples. Explain briefly the accounting term "reporting entity" in accordance with the Conceptual Framework for Financial Reporting. Regarding the recording and subsequent revaluation of inventory, please define "the lower of cost and net realizable value." Briefly explain the “accrual basis assumption" and why financial statements are prepared under this basis.arrow_forward
- Intermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage LearningCornerstones of Financial AccountingAccountingISBN:9781337690881Author:Jay Rich, Jeff JonesPublisher:Cengage LearningManagerial AccountingAccountingISBN:9781337912020Author:Carl Warren, Ph.d. Cma William B. TaylerPublisher:South-Western College Pub
- Financial And Managerial AccountingAccountingISBN:9781337902663Author:WARREN, Carl S.Publisher:Cengage Learning,Principles of Accounting Volume 1AccountingISBN:9781947172685Author:OpenStaxPublisher:OpenStax College