A Company Sells Inventory to Its Subsidiary, B Company at a Mark-Up

question 22

Multiple Choice

A Company sells inventory to its Subsidiary, B Company at a mark-up of 20% on cost. Of what significance is this transaction, should A wish to prepare Consolidated Financial Statements? The inventory is still in B's warehouse at year end.

• A) This is not significant. Any inter-company profits are eliminated during the Consolidation process.
• B) A's net income will be under-stated.
• C) B's income will be over-stated.
• D) There will be unrealized profits in inventory which will only be realized once B sells this inventory to outsiders.

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Definitions:

Corporate Financing

The ways in which a corporation secures capital funding to meet its operational needs and finance its activities, including equity and debt financing.

Equity Investment Securities

Financial assets purchased with the expectation of earning a return through dividends, capital appreciation, or both.

Retained Earnings

The portion of a company's profits that is kept or retained for reinvestment in the business or to pay debt, rather than distributed to shareholders.

Payment

The act of giving or transferring money or monetary value in exchange for goods, services, or to fulfill a legal obligation.