|Intercompany Inventory Transactions|
Inventory transactions are the most common form of intercompany exchange. Conceptually, the elimination of inventory transfers between related companies is no different than for other types of intercompany transactions. All revenue and expense items recorded by the participants must be eliminated fully in preparing the consolidated income statement, and all profits and losses recorded on the transfers are deferred until the items are sold to a nonaffiliate.
The recordkeeping process for intercompany transfers of inventory may be more complex than for other forms of transfers. There often are many different types of inventory items, and some may be transferred from affiliate to affiliate. Also, the problems of keeping tabs on which items have been resold and which items are still on hand are greater in the case of inventory transactions because part of a shipment may be sold immediately by the purchasing company and other units may remain on hand for several accounting periods. Nevertheless, the consolidation procedures relating to inventory transfers are quite similar to those discussed in Chapter 6 relating to fixed assets.