It is commonly known that, within a consolidated entity, one company can either sell merchandise with a profit embedded or depreciable or sell non-depreciable property with a gain embedded. Determine the financial impact, both positive and negative, of excluding such sales completely or of merely excluding the profit or gain embedded within the income of the sales. Next, suggest the financial reporting objectives of elimination entries, and give your opinion of whether the resulting financial statements would be misleading without the suggested elimination entries.
Per the textbook, GAAP is silent as to the appropriate treatment of preaffiliation profit. Construct one (1) argument in which you provide at least three (3) reasons for the elimination of preaffiliation profit in the consolidation process. Provide support for your rationale.