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Intercompany Transactions and Accrual

Note: Assume the entity uses accrual accounting.

Aceton Corporation owns 80 percent of the outstanding stock of Voctax, Inc. During the current year, Voctax made $140,000 in sales to Aceton. How does this transfer affect the consolidated statement of cash flows?

a. The transaction should be included if payment has been made.
b. Only 80 percent of the transfers should be included because the sales were made by the subsidiary.
c. Because the transfers were from a subsidiary organization, the cash flows are reported as investing activities.
d. Because of the intercompany nature of the transfers, the amount is not reported in the consolidated cash flow statement.
e. None of the above.
f. Cannot determine answer with facts presented.

Solution Preview

The answer is D.

Support comes from Home Depot in Financial Accounting 12e, 2006 (Williams, Haka, Bettner & Carcello).

The consolidated results include four wholly-owned subsidiaries that operate under The Home Depot Supply brand. The four subsidiaries are Apex Supply ...

Solution Summary

When a company owns stock in another and does business between the two, this answers the question as to how it is reported in the consolidated cash flow statement.