What are some ways the financials would be misstated if these intercompany transfers were not adjusted?

Unit 5 Discussion Part 1 Advance Accounting

Topic #1: One Plus One Equals One

In the case of human relations, marriages occur frequently. Once the business combination occurs, the assets and liabilities of the company become one. This is the same when a parent company buys a subsidiary corporation. You have noticed in your reading that intercompany transfers must be adjusted. With this in mind, please answer the following questions:

  • Why are adjustments necessary for intercompany transfers?
  • What are some ways the financials would be misstated if these intercompany transfers were not adjusted?
  • Provide an example on how a firm could manipulate the firm’s financial position and how these intercompany entries fix this problem.

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