Ch 6 Flashcards
True or False: Intercompany profits in inventory must be eliminated in consolidated financial statements to avoid overstating profits.
True
Intercompany profits in inventory must be eliminated to prevent overstating group profits, as these profits haven’t been realized outside the group.
True or False: In upstream transactions, a parent company sells assets to its subsidiary.
False
In upstream transactions, the subsidiary sells assets to the parent, while downstream transactions involve the parent selling to the subsidiary.
True or False: Unrealized profits from intercompany sales within a group are recognized as income in the consolidated statements.
False
Unrealized profits from intercompany sales are not recognized in consolidated statements until the assets are sold to an external party.
True or False: The equity method of accounting is used to consolidate income only when transactions are downstream.
False
The equity method can capture the cumulative effect of consolidation entries for both upstream and downstream transactions, not only downstream.
True or False: Non-controlling interest is affected by the elimination of unrealized profits in downstream transactions.
False
Non-controlling interest is not affected by the elimination of unrealized profits in downstream transactions; it is affected in upstream transactions.
True or False: When intercompany sales occur, the profit is considered realized only when sold to an external party.
True
Income from intercompany sales is considered realized only when the asset is sold to an external party.
True or False: Downstream transactions occur when the parent sells to its subsidiary.
True
Downstream transactions are when the parent sells to its subsidiary, while upstream transactions involve the subsidiary selling to the parent.
True or False: Losses on intercompany sales of inventory are eliminated in consolidated statements if the loss does not reflect the fair value of the asset.
True
Losses on intercompany sales are eliminated if they don’t reflect the fair value of the asset.
True or False: Income taxes on unrealized profits in intercompany transactions are expensed in the period the profits are eliminated.
False
Income taxes on unrealized profits are deferred until the profit is realized with an external sale.
True or False: Intercompany management fees and rental income between a parent and its subsidiaries must be reported on separate-entity financial statements, but not on consolidated statements.
True
Intercompany management fees and rental income are reported in separate-entity financial statements but are eliminated in consolidated statements.
True or False: Intercompany balances, like receivables and payables, are eliminated in consolidated financial statements.
True
Intercompany balances are eliminated to avoid double-counting within the group.
True or False: Unrealized profits on inventory must be eliminated to restate inventory at cost in the consolidated financial statements.
True
Eliminating unrealized profits on inventory ensures that inventory is reported at cost.
True or False: Intercompany land sales always result in realized gains that are included in the consolidated income statement.
False
Gains on intercompany land sales are unrealized in consolidated financials until sold to an external party.
True or False: Income taxes related to unrealized intercompany profits are expensed immediately in the period of the transaction.
False
Income taxes on unrealized intercompany profits are deferred until the profit is realized.
True or False: The consolidated net income is adjusted by eliminating unrealized intercompany profits, which impacts consolidated retained earnings.
True
Unrealized intercompany profits are eliminated to adjust consolidated net income, impacting retained earnings.
True or False: Intercompany rental income between parent and subsidiary affects consolidated net income even after elimination adjustments.
False
Intercompany rental income is eliminated in consolidation to ensure net income reflects only external transactions.
True or False: The elimination of unrealized intercompany profit is required to accurately apply the matching principle in consolidated statements.
True
Eliminating unrealized intercompany profits ensures expenses are recognized in the same period as the corresponding revenue.
True or False: Upstream transactions affect the non-controlling interest share of net income in consolidated financial statements.
True
In upstream transactions, non-controlling interest is impacted as it shares in the subsidiary’s profits.
True or False: Under the equity method, the parent’s income will equal consolidated net income attributable to the parent’s shareholders.
True
Under the equity method, the parent’s income reflects the consolidated net income attributable to its shareholders.
True or False: Gains or losses on intercompany sales of non-depreciable assets, such as land, are eliminated until the asset is sold to an external party.
True
Gains or losses on intercompany sales of non-depreciable assets are eliminated until sold externally.
True or False: A parent company sells inventory to its subsidiary at a profit. Since the profit is unrealized in the consolidated statements, the related income tax expense must also be deferred.
True
The related income tax expense is deferred to align with the revenue recognition when the inventory is sold to an outside party.
True or False: When a subsidiary makes a profit selling to the parent company, any associated income tax expense is included in the subsidiary’s financials but eliminated in the consolidated statements.
True
The income tax expense is recorded in the subsidiary’s books but must be eliminated in the consolidated statements.
True or False: A deferred tax asset is recognized when intercompany profits are eliminated in consolidated statements because these profits create a temporary difference between taxable income and financial income.
True
Eliminating intercompany profits creates a temporary difference, and a deferred tax asset may be recognized.
True or False: A parent company sells land to its subsidiary at a gain. For consolidation, both the gain and the related income tax expense on the gain must be eliminated until the land is sold to an external party.
True
Both the gain and the related tax expense are eliminated to prevent overstatement of group income and taxes.
True or False: When eliminating unrealized intercompany profits from inventory in consolidated financials, the deferred income tax associated with these profits is recognized in the year the inventory is sold outside the group.
True
The deferred income tax is recognized when the inventory is eventually sold outside the group.
True or False: In the year of intercompany sale, the deferred tax liability for unrealized profits should be recorded in the selling company’s financial statements to reflect the temporary difference in consolidated statements.
True
Recording a deferred tax liability reflects the temporary difference in consolidated statements.
True or False: A subsidiary sells equipment to its parent at a gain. In the consolidated financial statements, the gain is eliminated along with the related tax effect, which reduces the deferred tax expense for the parent.
False
The related tax effect doesn’t reduce deferred tax expense; it’s recorded as a deferred tax liability until realized.
True or False: A parent company charges a management fee to its subsidiary. Since this fee does not generate profit outside the group, both the fee and the associated tax liability must be eliminated in consolidation.
True
Both the management fee and any associated tax liability are eliminated in consolidation.
True or False: Deferred tax expenses are not required to be adjusted when eliminating unrealized profits if the intercompany transaction occurs at the end of the fiscal period and the inventory has not yet been sold to an outside party.
True
Deferred tax adjustments are only necessary once the inventory is sold outside the group.
True or False: When intercompany transactions create unrealized profits, the deferred tax liability arising from these profits will be reversed in the consolidated statements when the related assets are eventually sold outside the group.
True
Deferred tax liabilities from unrealized profits are reversed once the related assets are sold to external parties.
