A fellow student of yours who has just completed a course in management accounting recently made the following comment to you regarding the establishment of transfer prices for transnational transfers of goods and services within the same company: "In the process of preparing consolidated financial statements, all profit and loss attributable to internal transfers of goods and services are removed. The amount of profit a company reports is therefore affected only by transactions with external parties. Therefore, the subject of transfer pricing may be important for motivational purposes or some other managerial objective, but the choice of a transfer pricing system has no effect on the bottom line, even when transfers are made between units of a company operating in different countries."
Required:
Critically analyze and respond to the above assertion.

Question

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The Answer of A fellow student of yours who has just completed a course in management accounting recently made the following comment to you regarding the establishment of transfer prices for transnational transfers of goods and services within the same company: "In the process of preparing consolidated financial statements, all profit and loss attributable to internal transfers of goods and services are removed. The amount of profit a company reports is therefore affected only by transactions with external parties. Therefore, the subject of transfer pricing may be important for motivational purposes or some other managerial objective, but the choice of a transfer pricing system has no effect on the bottom line, even when transfers are made between units of a company operating in different countries."
Required:
Critically analyze and respond to the above assertion.

A Fellow Student of Yours Who Has Just Completed a Course