In preparing consolidation working papers,why is it necessary to eliminate intercompany profits?
A)To nullify the effect of intercompany transactions on consolidated financial statements
B)To defer intercompany profits until the following year
C)To allocate unrealized profits until the following year
D)To reduce consolidated income

Question

Quizplus · Accepted Answer

Intercompany profits can distort the consolidated financial statements, as they essentially represent transactions between the same company. Eliminating these profits helps to reflect more accurate information about the performance and financial position of the consolidated entity. B, C, and D are not correct because deferring, allocating, or reducing profits does not address the issue of intercompany transactions affecting consolidated financial statements.

In Preparing Consolidation Working Papers,why Is It Necessary to Eliminate