In Preparing Consolidation Working Papers, Why Is It Necessary to Eliminate

question 2

Multiple Choice

In preparing consolidation working papers, why is it necessary to eliminate intercompany profits?

• A)To nullify the effect of intercompany transactions on consolidated financial statements
• B)To defer intercompany profits until the following year
• C)To allocate unrealized profits until the following year
• D)To differentiate between realized and unrealized profits

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Definitions:

Sales

The total revenue generated from goods or services sold by a company.

Product Costs

Costs that are assignable to the production of goods, including direct materials, direct labor, and manufacturing overhead.

Period Costs

Expenses that are not directly tied to the production process and are recorded as expense in the period they are incurred, such as selling, administrative, and general expenses.

Variable Cost

Charges that adjust seamlessly with the volume of manufacturing or services provided.