Sally Corporation, an 80%-Owned Subsidiary of Reynolds Company, Buys Half

question 9

Multiple Choice

Sally Corporation, an 80%-owned subsidiary of Reynolds Company, buys half of its raw materials from Reynolds.The transfer price is exactly the same price as Sally pays to buy identical raw materials from outside suppliers and the same price as Reynolds sells the materials to unrelated customers.In preparing consolidated statements for Reynolds Company and Subsidiary Sally Corporation,

• A)​the intercompany transactions can be ignored because the transfer price represents arm's length bargaining.
• B)​any unrealized profit from intercompany sales remaining in Reynolds' ending inventory must be offset against the unrealized profit in Reynolds' beginning inventory.
• C)​any unrealized profit on the intercompany transactions in Sally's ending inventory is eliminated in its entirety.
• D)​eighty percent of any unrealized profit on the intercompany transactions in Sally's ending inventory is eliminated.

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Definitions:

Weighted Average

A mean calculated by giving values in a data set more influence according to some attribute of the data, often used in financial calculations like inventory costs and portfolio returns.

Free Cash Flows

Free Cash Flows represent the cash a company generates after accounting for cash outflows to support operations and maintain its capital assets.

Weighted Average

An arithmetic mean of values where each value has a specified weight or importance attached to it, commonly used in financial calculations.

Free Cash Flow

The net money generated by a firm after deducting expenses incurred in maintaining operations and the investment in capital goods.