Question

How are intra-entity inventory transfers treated on the consolidation worksheet and how are they reflected in a consolidated statement of cash flows?

Answer 1

When we consolidate the financial statements of parent and subsidiary company then all the intercompany transactions needs to be eliminated.

Consolidation means that both the entities are the same and as a general rule no one can earn profit from himself.

If the inventory has been purchased by the parent company, then this must has been recorded as a sale in the books of the subsidiary and hence the profit that has been recorded on this sale has to be removed from the subsidiary's books.

Subsidiary book at the time of purchases made by the parent company.

Parent company    DR

Cost of goods sold    DR

Sales CR

Since both of the entities are the one, there is no sale but a transfer only. The transfer will be considered as a transfer of goods from one place to another and hence the gross profit needs to be deleted from the books.

This must be done on Subsidiary book

Sales DR

Cost of goods sold CR

(The cost must has been credited with that part that has been equal to the profit earned so that the inventory level will now be same)

Intra-entity inventory transfers are eliminated on the consolidation worksheet and therefore do not appear in the consolidated statement of cash flows.