Advanced Accounting Chp 5: Consolidated Financial Statements - Intra-Entity Asset Transactions Intra-Entity Inventory Transfers For internal reporting purposes, recording an inventory transfer as a sale/purchase provides vital data to help measure the operational efficiency of each enterprise. oAn intra-entity transfer is merely the internal movement of inventory, an even that creates no net change in the financial position of the business combination taken as a whole. Thus, in producing consolidated financial statements, the recorded effects of these transfers are eliminated so that consolidated statements reflect only transactions (and thus profits) with outside parties. The entire impact of the intra-entity transfer must be identified and then removed. The Sales and Purchases Accounts To account for related companies as a single economic entity requires eliminating all intra-entity sales/purchases. oThe following consolidation worksheet entry is necessary to remove the resulting balances from the externally reported figures. Cost of Goods Sold is reduced here under the assumption that the Purchases account usually is closed out prior to the consolidation process. o The total recorded (intra-entity) sales figure is deleted regardless of whether the transfer was downstream (from parent to sub) or upstream (from sub to parent). Furthermore, any gross profit included in the transfer price does not affect this sales/purchases elimination. Intra-Entity Gross Profit - Year of Transfer (Year 1) Despite previous elimination, gross profits in ending inventory created by such sales can still exist in the accounting records at year-end. These profits initially result when the merchandise is priced at more than historical cost. oActual transfer prices are established in several ways, including the normal sales price of inventory, sales price less a specified discount, or at a predetermined markup about cost. oRegardless of the method used for this pricing decision, gross profits that remain in inventory at the year-end as a result of intra-entity sales during the period must be removed in arriving at consolidated figures. All Inventory Remains at Year-End Although the Consolidation Entry TI shown earlier eliminated the sales/purchase figures, the $30,000 inflation created by the transfer price (sales price) still exists in two areas of the individual statements:
oEnding inventory remains overstated by $30,000. oGross profit is artificially overstated by the same amount Correcting the ending inventory only requires reducing the asset.
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