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.

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Definitions:

Company's Facilities

The physical infrastructure and assets of a company, including buildings, machinery, workspaces, and technology equipment, that support its operations.

Physical Controls

Controls that restrict unauthorized individuals from gaining access to a company’s computer facilities.

Risk Transference

The strategy of transferring the potential impact of specific risks from one party to another, often by using insurance or other contractual agreements.

Purchasing Insurance

The act of buying protection against financial losses from an insurance company.