Company a Sells Inventory to Its Subsidiary, Company B at a Mark-Up

question 65

Multiple Choice

Company A sells inventory to its subsidiary, Company B at a mark-up of 20% on cost. Of what significance is this transaction, should A wish to prepare consolidated financial statements? The inventory is still in B's warehouse at year end.

• A) This is not significant. Any inter-company profits are eliminated during the Consolidation process.
• B) A's net income will be under-stated.
• C) B's income will be over-stated.
• D)There will be unrealized profits in inventory which will only be realized once B sells this inventory to outsiders.

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Definitions:

Maximizing Law

The principle that organisms will choose behaviors that maximize rewards and minimize penalties under conditions of uncertainty.

Blisspoint

The optimal level of satisfaction or happiness an individual achieves from a specific action or set of circumstances, often used in consumer behavior studies.

Respond

To react or reply to something, typically as a result of external stimuli.

Matching Law

A theory stating that the proportion of responses directed towards one alternative corresponds to the proportion of reinforcements received from that alternative.