One Element of the General Transfer-Pricing Rule Is Opportunity Cost

question 11

Essay

One element of the general transfer-pricing rule is opportunity cost. Briefly define the term "opportunity cost" and then explain how it is computed for (1) companies that have excess capacity and (2) companies that have no excess capacity.

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Definitions:

Statement of Cash Flows

A financial report that provides aggregate data regarding all cash inflows and outflows a company receives.

Investing Activities

Transactions that involve the purchase or sale of long-term assets and investment securities that are not considered cash equivalents.

Financing Activities

Transactions with creditors and investors affecting the equity and/or long-term liability aspects of a business's balance sheet.

Direct Method

A cash flow statement preparation approach where actual cash inflows and outflows from operating activities are listed directly.