Chapter 6, Problem 6.1Q

Why must inventory transfers to related companies be eliminated in preparing consolidated financial statement?

To determine

Concept Introduction:

Consolidated financial statements:

Consolidated financial statements are prepared by a parent company to consolidate the assets and liabilities of the parent and its subsidiaries. 

To Indicate the reason for the elimination of inventory transfers to related companies while preparing the consolidated financial statements.

Explanation of Solution

A consolidated balance sheet shows the combined balances of the parent company and its subsidiaries. On the balance sheet of the parent company, all the assets of the subsidiary are added with the assets of the parent company. The intercompany transactions are eliminated from the consolidated financial statement because it will create an unnecessary financial recording. Hence, the intercompany inventory transactions are also eliminated while preparing the consolidated financial statements.