The effect of an intragroup sale of inventories at a profit where the inventories are still on hand at the end of the reporting period is that both profit and the inventory asset are overstated.

Question

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Intragroup sales at a profit where the inventories are still on hand at the end of the reporting period result in an overstatement of profit because the profit recognized on the sale within the group does not represent a real profit to the group as a whole until the inventory is sold to an external party. Similarly, the inventory asset is overstated because it includes the unrealized profit margin.

The Effect of an Intragroup Sale of Inventories at a Profit