RSM321H1 Chapter Notes - Chapter 6: Deferred Income, Income Tax, Income Statement

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3 Dec 2017
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Intercompany revenue and expenses to ensure that consolidated financial statements reflect only transactions between the single entity and those outside the entity, all intercompany transactions are eliminated. A transaction with an outside entity that is not associated with the consolidated group is referred to as an arm"s-length transaction. Revenue is recognized when it is earned in a transaction with an outsider in accordance with the revenue recognition principle. The cost of sales is expensed in the same period as the revenue in accordance with the matching principle. If the intercompany sales transactions are not eliminated, then sales and cost of sales would be overstated for the consolidated entity. The elimination entries are recorded on the consolidated working papers and not in the separate-entity books of the parent and the subsidiary. Three types of unrealized intercompany profits (losses) in assets are eliminated: profits in inventory, profits in non-depreciable assets; and, profits in depreciable assets.

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