Flatt Ltd Is a Wholly-Owned Subsidiary of Franco Ltd

question 31

Multiple Choice

Flatt Ltd. is a wholly-owned subsidiary of Franco Ltd. For consolidation purposes, how does the treatment of unrealized profits on upstream sales differ from the treatment of unrealized profits on downstream sales?

• A)Unrealized profits must be eliminated on upstream sales, but not on downstream sales.
• B)Unrealized profits must be eliminated on downstream sales, but not on upstream sales.
• C)Unrealized profits must be eliminated for both upstream and downstream sales.
• D)Unrealized profits are not eliminated on either upstream or downstream sales.

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Definitions:

Ending Inventory

The valuation of goods available for sale at the end of an accounting period; part of the calculation of cost of goods sold.

Periodic Inventory System

An inventory accounting system where updates to inventory levels are made on a periodic basis, rather than being updated continuously.

First-In, First-Out

An inventory valuation method where the goods first purchased or produced are also the first to be sold, impacting the cost of goods sold and inventory value.

Average Cost

A calculation used in finance and economics that divides the total cost of production by the number of goods produced, yielding the cost per unit.