How unrealized intercompany inventory profits from a prior affect the computation of consolidated net income when resold in the current period.

Intercompany transactions entail the selling of goods and services at a higher price as compared to the original. However, unrealistic profits arise when the company fails to sell the products to third parties. In this case, what should be borne in mind is that in the process of computing of consolidated net income, intercompany balances as well as unrealized profits ought to be eliminated. This is because the inclusion of the unrealized intercompany inventory profits will affect group retained earnings and group inventory. To avoid this, adjustments should be done on the consolidated financial statements to ensure that unrealized profit is cancelled in cases where any given group company still holds goods during the reporting date. Another reason for the cancellation is to ensure that the inventory is included at the original cost the given company or group.

Whether knowing if the sale was upstream or downstream from a financial and economic perspective to the parent.

There is no need for knowing whether the sale was upstream or downstream since the unrealized profits are always eliminated from the controlling interest’s share during the preparation of consolidated statements. Additionally, in the upstream sale, the elimination is done proportionately from the controlling and non-controlling shareholders’ interests. Given the adjustments on the effects of the unrealized profit or even loss, it simply implies that the group or company assumes that no sale took place during that time thus ensuring that income in the parent subsequent periods is not affected in any given way. However, when unrealized intercompany profits on upstream and downstream sales are realized, it will imply deriving benefits from the asset until its potential expiry.

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