Problem
You, the controller, recently had the following discussion with the president. President: I just don't understand why we can't recognise revenue from the inter company sale of inventory on the consolidated financial statements. The subsidiary company sold the goods to parent at fair value and received the cash for the sale. We need to record the profit on this sale in order to maintain the steady earnings growth for four companies. Otherwise, the bank will be concerned about our ability to repay the load. Controller: you are right eh subsidiary has received the cash, but that is not the main criteria for determining when to recognize the revenue. Furthermore, you need to understand that the consolidated financial statements are different from the individual financial statements for the parent and subsidiary. President: I have never understood why we need to prepare financial statements. It is just extra work. Who used these statements? Furthermore, the profit on the intercompany transaction should be reported on the income statement because tax had to be paid on this profit. Surely, if tax is paid, the profit is legitimate. Controller: once again, cash payments do not determining when we repost income tax expense on the income.