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  1. avatar says

    Dear John, just wanted to check if i have understood inter entity transactions as intended in the lectures:-

    (i)All inter entity transactions are excluded to reflect profits from only outside the group.In a way, it reduces the problem of double counting which arises due to consolidation

    (ii)Cost of sales and inventory are adjusted only if there are any unsold inventory. Adjustment is made by increasing the cost of sales equal to the amount of unrealized profit which reduces the retained earnings. Accordingly, inventory is reduced by an equal amount . Assets and liabilities should match since inventory and retained earnings are reduced by an equal amount.

  2. avatar says

    Dear Mr. Moffat, since the unrealized profit on inventory was recorded by the selling company, would it not be easier (and the same effect) if we subtracted the profit from the sales revenue than adding it to the cost of sales? Arithmetically, it’s the same but I’m just wondering if it could be any different?

    • Avatar of MikeLittle says

      Hi, although the end result would be arithmetically the same, your suggestion is not correct. The goods, when originally purchased, are in the buyer’s cost of sales (purchases) at say $10 and closing inventory at $10). The buyer sells for say $15 and the other group company includes $15 in its cost of sales (purchases) and closing inventory $15. So now it’s in revenue at $15 and in cost of sales at $10 (original purchase) and at $15 (intra-group sale / purchase) and in closing inventory at $15. To get to the correct position, we need to cancel the intra-group sale dollar for dollar. Thus we eliminate $15 from combined revenue and from combined cost of sales. That leaves us with +$10 in cost of sales (original purchase) and -$15 in cost of sales (closing inventory) To arrive at the correct position, we need to reduce that closing inventory by $5. Thus, we must ADD $5 to cost of sales and reduce combined closing inventory on the CSoFP.

      Clear?

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