A.All Internal Sales Are Resold Externally

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B10.3330-Notes – 10/28/02

John Bildersee 2002

A.Intercompany sales of inventory

1.Possibilities

a.All internal sales are resold externally

b.Some internal sales are not resold externally

2.Seller

CGS - 1

Inventory - 1

A/R - 1

Revenue - 1

3.Buyer

Inventory – 2 (= revenue – 1)

A/P – 2 (=A/R – 1)

4.If resold externally

CGS - 2

Inventory - 2

A/R - 2

Revenue - 2

a.Working paper eliminations ((WPE entries)

Revenue – 1

CGS – 2

A/P – 2

A/R - 1

b.Net entry

CGS - 1

Inventory - 1

A/R - 2

Revenue - 2

c.All profits earned and reported in consolidated statement

5.Net if NOT sold externally

a.Nothing happened relative to outside world

b.False profit if not sold externally

i)Profits called unconfirmed profits

ii)Are in inventory of the purchasing segment of the consolidated company

c.If a downstream sale – adjust investment account

Equity in income – S

Investment in S

d.Eq = inc – unconfirmed 

e.If a upstream sale – adjust investment account

Equity in income – S

Investment in S

f.Eq = inc – n% unconfirmed 

g.Must be removed from consolidation

h.Remove revenue & profit from internal sale – 1

i.Return inventory to value before internal sale - 1

j.WPE entry to reduce sales and CGS (inventory of acquiring unit)

Actual WPE

Remove internal sales

Sales – (internal sale

Inv – (= inventory of buying unit)

CGS – (=cost of selling unit)

Inventory – (=cost of selling unit)

Net WPE

Sales – (internal sales)

CGS – (original internal sales)

Inventory – (to remove unconfirmed profits)

6.Net Result

a.Unconfirmed profit in ending inventory of company segments

b.No unconfirmed ending profit in inventory of consolidated firm

c.Reported profit of consolidated firm < profits of the parts

d.There are unconfirmed profits in next period’s beginning separate inventories

7.Intercompany profit in beginning inventory

a.WPE entries have no impact on P & S’s books

b.Beginning inventory overstated on the books

c.If a downstream sale – adjust investment account

Investment in S

Equity in income – S

d.Eq = inc + unconfirmed  of goods sold during period

e.If a upstream sale – adjust investment account

Investment in S

Equity in income – S

f.Eq = inc + n% unconfirmed  of goods sold during period

g.Removal of impact of downstream sales

i)Like land sale

ii)Reduction in inventory value as part of WPE rebuilds investment in S

Investment in S

Inventory

h.Removal of impact of upstream sales

RE - S

Inventory

i.Will provide income to parent and MI when it is allocated on sale

8.Comparison

a.Unconfirmed sale (to ending inventory) + beginning inventory sold

b.Same as sale & resale within a period

9.Miscellaneous comments

a.Adjustments to equity in sub’s income in unconsolidated parent’s statement

i)Eq = inc from sub – unconfirmed  of parent – n% unconfirmed  from sub

ii)i) + previously unconfirmed  of parent now confirmed + n% previously unconfirmed  from sub now confirmed

B.Summary

1.Concept same in every case

a.Eliminate impact of intercompany transactions

b.Eliminate gains in first year

i)Eliminate revenues

ii)Eliminate expenses

iii)Eliminate payables

iv)Eliminate receivables

c.Eliminate equity or ownership in later years

d.Restate upgraded values to original values

e.Adjustments end with external sale or completed use

2.Details differ

a.Land has no aging – gains unconfirmed until external sale

b.Depreciable assets age – gains confirmed over depreciable life

c.Inventory – gains confirmed with external sale