ACCA F3 Group Accounts The Consolidated Income Statement (part b) View ACCA F3 / FIA FFA lectures Download F3 notes
as we dont want to show the insider transaction so we deduct $28000 from s revenue but why deduct $28000 from cost of sales of P.
As cost of sales means cost of goods that are being sold , coming out by reducing closing inventory from purchases. And as P purchases $28000 worth goods but sold 3/4th of the goods, isnt that much amount should have been there in the cost of sales of P = ( 28000 x 3/4 ) = 21000. so isn’t that we should have deducted 21000 from cost of sale cause remaining 7000 of the goods are in inventory of P.
as in previous chapters we learn op. inventory + purchases – closing inventory = cost of sales
or is it that we totally want to ignore if such sales or purchases happen so we reduce $28000 from both P purchases and S revenue . In that case it will look like the entity as a whole selling those 3/4th of the goods to the outsider at $21000 and 1/4th will be remaining in inventory, In that case isnt that S cost of sales will not include that 1/4th part of the goods worth 5000 without profit.
John Moffat says
We do it the way I do in the lecture because that is what the accounting standard requires us to do!
We subtract the inter-company sales from both the total sales and the total purchases. If there is any left in inventory then we add the PURP to the cost in order to reduce the profit accordingly.
We have no choice, and I explain in the lecture how the end result is what we want.
ok for here we do this i got it
but normally cost of sales we find out this way right in the other questions
( op. inventory + purchases -closing inventory )
actually got confused
Thanks a lot
John Moffat says
You are welcome 🙂
Good evening Mr Moffat. I’ve read all the questions and replies above but didn’t find an explanation for my question to example 3: we deduct $28 000 both from revenue and cost of sales in the consolidated SOPL so its not included in revenue and cos of the group any more.
1) I understand that we have to remove $2 000 of unrealised profit from inventory for the CSOFP as the real cost of purchase to the group is the cost of original purchase?
2) We also have to add the unrealised profit of $2 000 to cost of sales to reduce the gross profit – so firstly we remove the whole transacion of $28 000 from revenue and cost of sales and then we add back the unrealised profit of $2 000 to cost of sales – my question is why the unrealised profit of $2 000 increases the group cost of sales if there were no sales outside for $7 000? Please advise – I don’t see the logic here. Thank you!
John Moffat says
You agree that we remove the inter-company sales by reducing the groups sales and group purchases by 28,000, so as to only show the external sales and purchases. This is clearly better presentation, but does not actually change the total profit – so far the total profit is still the same as the total of the profits reported by the individual companies.
However, the total profit will still include all the profits on the inter-company sales (the company who sold to the other will have taken full profit on these sales). That is fine provided that the goods were then all sold externally, but those remaining in inventory had not been sold externally and therefore the profit on those the PURP needs removing which makes the total group profit lower. There are several ways we could show the group profit as being lower (for example, we could reduce the total group sales), but the accounting standard says that we should do it by adding the PURP to the groups cost of sales. This does achieve the desired result of reducing the group profit by the PURP.