BUS 420 Chapter Notes - Chapter 6: Income Statement, Deferred Income, Consolidated Financial Statement

• School: Simon Fraser University
• Department: Business Administration
• Course: BUS 420
• Professor: Arsineh Garabedian

Document Summary

Companies must have systems in place that identify information about internal (versus external) sales and purchases. Many intercompany sales take place at fair market value (rather than at cost) Behavioral reasons (if management evaluated based on company net income, transactions should occur at fair market value) Resulting from downstream sales, where the parent sells to its subsidiary. Resulting from upstream sales, where a subsidiary sells to the parent. Parent will charge its subsidiary companies a management fee, which allocates head office cost to all the companies within the group. Buildings or equipment owned by one company are used by another company within the group with a corresponding rental charge. One company may record interest income on a loan to another company, which records a corresponding interest expense. All revenue and expenses must be eliminated against each other on the consolidated income statement. Since equal amount of income and expense are being eliminated, there is no net effect on consolidated income.