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The Equity Method Intercompany Inventory Profits Instructor Version Summer I 2009 (1)

The Equity Method Intercompany Inventory Profits Instructor Version Summer I 2009 (1)

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Accounting 401 Unrealized Intercompany Inventory Profits for Significant Influence Investees Summer I 2009 When investors and investees sell inventories to each other, in order to determine equity in investee income, intercompany profits in the ending inventory of the purchasing company should be deferred until those goods are sold. Thus, the equity method accounts for timing differences with respect to such profits. Later in the course, we will see that consolidation accounting makes similar assumptions. The equity method is often referred to as “one-line consolidation.” As the class progresses, you should see the similarities in these two approaches. When the investor sells inventories to the investee, we refer to such sales as downstream sales. If an investee sells to the investor, we call them upstream sales. Note that for significant influence investees, the accounting for downstream and upstream intercompany inventory profits is the same.
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