Eliminating Inventory Transfers
Ready Building Products has six subsidiaries that sell building materials and supplies to the public and to the parent and other subsidiaries. Because of the invoicing system Ready uses, it is not possible to keep track of which items have been purchased from related companies and which have been bought from outside sources. Due to the nature of the products purchased, there are substantially different profit margins on different product groupings.
Required
a. If no effort is made to eliminate intercompany sales for the period or unrealized profits at yearend, what elements of the financial statements are likely to be misstated?
b. What type of control system would you recommend to Ready’s controller to provide the information needed to make the required elimination entries?
c. Would it matter if the buyer and seller used different inventory costing methods (FIFO, LIFO, or weighted average)? Explain.
d. Assume you believe that the adjustments for unrealized profit would be material. How would you go about determining what amounts must be eliminated at the end of the current period?
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