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Department
Business
Course
BUSI 3001
Professor
All Professors
Semester
Winter

Description
Chapter 61Calculate gross profit on sales and markup on costThe gross profit percentage is calculated as the gross profit amount divided by the sales amountIt is also referred to as the markup on salesThe markup on cost is equal to the gross profit amount divided by cost of goods sold Always read the information carefully to determine if you are given the markup as a percentage of sales or as a percentage of cost2Describe the effect on consolidated profit of the elimination of both intercompany revenues and expenses and intercompany asset profits Consolidated financial statements present the financial position and results of operations of the parent and subsidiary as if they were combined as a single economic entityThe consolidated financial statements should report only transactions with entities outside of the combined entity Intercompany profits are only considered realized when the items have been resold outside the entitySince the parent and subsidiary are part of the same economic entity transactions between them are not transactions with outsidersTherefore intercompany revenues and expenses must be eliminated and not reflected as transactions on the consolidated financial statementsThe consolidated financial statements should reflect what the account balances would have been had the intercompany transactions not occurred If one entity records intercompany revenue and the other entity records the intercompany expense the two amounts net out on consolidationHowever the purpose of eliminating these revenues and expenses is to ensure that both revenues and expenses are not overstated on the consolidated income statementSince the revenues and expenses are offsetting there is no impact on the bottom line on the consolidated income statementTherefore NCI is not affected by the elimination of an equal amount of revenue and expense3Define upstream and downstream salesThe parent is the controlling party and the subsidiary is the controlled partySo the parent looks down at the subsidiary and the subsidiary looks up to the parent3Define upstream and downstream sales continuedIntercompany transactions are defined as either upstream or downstream depending on who is the sellerWhen a parent sells to the subsidiary it is a downstream transactionWhen profit is eliminated on downstream transactions it is charged to the parent 100 of any unrealized profit is removed from consolidated net income Since the NCI has no interest in the parent the NCI is not affected by downstream transactions1When the subsidiary sells to the parent or another subsidiary of the parent it is an upstream transactionWhen profit is eliminated on upstream transactions it is charged to the subsidiary100 of any unrealized profit is removed from consolidated net income The NCI is affected by upstream transactions since the NCI shares in the profits of the subsidiary A portion of the unrealized profit is allocated to the NCI 4Prepare consolidated financial statements that reflect the elimination of upstream and downstream intercompany profits in either the parents or the subsidiarys ending inventoryThe gross profit on inventory is recognized when inventory is sold to outsidersWhen the subsidiary sells to the parent the profit has not yet been realized from a consolidated viewpoint Therefore the profit is held back from being recognized in net income until it is sold to outsidersAdjustments to eliminate unrealized profits in ending inventory are facilitated by preparing a schedule of unrealized intercompany profits The before tax unrealized profit amount is listed next the related tax on this amount is calculated and then the after tax unrealized profit is determinedIf inventories are overstated at the end of the year income is overstated for the year The gross amount of both upstream and downstream intercompany sales is removed from the sales and cost of goods sold accounts when preparing the consolidated statements The before tax amount of unrealized profit is removed from ending inventory and added to cost of goods and the tax effect is removed from income tax expense and added to deferred income tax assets This way only the realized after tax profits are reportedWhen losses are recognized on intercompany transactions the intercompany transactions should be eliminated on consolidation Then the assets involved in the intercompany transaction should be checked for impairment5Prepare consolidated financial statements that reflect the realization of upstream and downstream intercompany profits in inventory that were held back in previous periodsWhen the inventory purchased from an entity within the consolidated entity is sold to outsiders the profit that was held back in previous years is now realized from a consolidated viewpoint and is recognized in consolidated net incomeSince inventory is typically sold within a year of purchase intercompany profits are typically eliminated in one year and then realized and added to consolidated income in the next year5Prepare consolidated financial statements that reflect the realization of upstream and downstream intercompany profits in inventory that were held back in previous periods continuedThe timing for recognition of profits is different between the separate entity books and the consolidated statementsOver several years cumulative profits since the date of acquisition 2
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