Distinguish between an upstream sale of inventory and a downstream sale. Why is it important to know whether a sale is upstream or downstream? How do unrealized intercompany profits on a downstream sale of inventory made during the current period affect the computation of consolidated net income and income to the controlling interest? Explain.
An upstream sale is when the subsidiary sells to the parent. Downstream is the reverse, with the parent selling to the subsidiary.
During consolidation, intercompany profit (for items not yet sold to parties outside the consolidated group) is eliminated since the two entities are treated as one economic entity ...
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