A Fellow Student of Yours Who Has Just Completed a Course

question 105

Essay

A fellow student of yours who has just completed a course in cost accounting recently made the following comment to you regarding the establishment of transfer prices for transnational transfers of goods and services within the same company: "In the process of preparing consolidated financial statements,all profit and loss attributable to internal transfers of goods and services are removed.The amount of profit a company reports is therefore affected only by transactions with external parties.Therefore,the subject of transfer pricing may be important for motivational purposes or some other managerial objective,but the choice of a transfer pricing system has no effect on the bottom line,even when transfers are made between units of a company operating in different countries."
Required: Critically analyze and respond to the above assertion.

---

Definitions:

Freight Costs

Expenses associated with transporting goods between the vendor and the buyer, which may be borne by either party.

Sales Discount

A reduction from the usual cost of a product or service offered to customers to encourage prompt payment or increase sales.

Customers Pay

refers to the transactions where customers remit payment for goods or services received from a business.

Prepaid Freight

Costs paid by a shipper in advance for shipment of goods, indicating that the sender bears the freight charges.