P and L intra group inventory and goods in transit

“And also there is no deduction of invoiced value of 100 from COS it is deducted from revenue only why?”

Because it isn’t yet included within the subsidiary’s cost of sales – because the subsidiary has not yet received nor accounted for these goods

Personally, I would have accelerated the goods into the subsidiary, then cancelled the intra-group trade of 100 (Dr revenue, Cr cost of sales) then accounted for the additional pup on these goods in transit (Dr cost of sales, Cr group inventory) then cancelled the receivable / payable current accounts – presumably they now reconcile

BPP do it one way, I go the long way round!

How can I sell goods to myself? That would be nonsense if we didn’t cancel revenue against cost of sales by the value of the intra-group trade and then add back the pup (how can you recognise a profit simply by transferring goods from one pocket to another?)

The purpose of consolidation is to present the results of a group of companies as though they were a single entity.

How can ABC company sell goods to ABC company?

That’s why the value of the transaction is eliminated from both revenue and from cost of sales

But the selling company has also recognised a profit which still sits in the value of the inventory of the buying company.

That’s why we have to make the pup adjustment

Better?

Because I can’t buy from myself in the same way that I can’t sell to myself. Just cancel the intra-group sale. Ok with that?

Now, think about the inventory valuation. It’s in the hands of the buyer and they have valued it at cost to them. But that cost to them includes the profit recognised by the seller. So we need to eliminate that profit.

Summary? Eliminate the intra-group sale and purchase.

Then eliminate the unrealised profit from the stock valuation

OK now?

No – it’s the closing inventory that is incorrectly stated. The buying company will have valued their inventory at the lower of cost and net realisable value. But “cost” for the buying company includes that profit element that was charged by the selling company and, so far as the group is concerned, group inventory should be valued at the lower of cost and net realisable value.

Now, a BIG step! Do you accept that if I take $10,000 out of revenue and $10,000 out of purchases / cos, then that has the effect of eliminating the intra-group sale and purchase?

OK, so now forget that transaction and move on into other areas.

– reconcile the current accounts

– time apportion the subsidiary’s results where we acquired the subsidiary this year

– account for dividends payable and receivable

– and ……. oh yes! There’s a pup in the closing inventory and that means that our group closing inventory is overvalued. That, in turn, means that our cost of sales is understated and out gross profit is correspondingly overstated

So let’s make the pup adjustment to the closing inventory value

Dr Cost of Sales by reducing Closing Inventory on the Profit or Loss thereby increasing cost of sales and reducing profit

Cr Closing Inventory on the statement of financial position thereby reducing assets in line with the reduction of profits

Is that better?

You’re welcome