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Unfortunately, there is something I don’t really understand about consolidation of P&L.
In case there was intra-group sale in the period we need to adjust both Revenue and Cost of sales on the day of consolidation to eliminate costs and revenues of this sale.
The piece I don’t understand is why we reduce the cost of sale by the same amount as revenue.
For instance, in example 3 in the Chapter 12 Nick sold goods to Gary at $10m price. Nick used mark-up of 25% to get to $10m price. Thus, Nick cost of sale is $8m. Based on that I would would reduce group revenue by $10m and group cost of sale by $8m but in the lecture both Revenue
and CoS were reduced by $10m and I don’t understand why.
Could you please clarify this?
It is because when the sale is made the selling company records it at the selling price, and the purchasing company will have recorded it at the price paid, being the price it was sold to them at.