Merchandise transactions such as sales among members of a consolidated firm are eliminated in the preparation of consolidated financial statements. Is this treatment accurate? Why or why not?
How does it affect the relevance and reliability of information presented to the financial statement users?
Depending on the size of the intercompany transactions that are eliminated, the financial statement activity might be considerably understated. Is this a problem? Why or why not?
How might a potential investor or creditor evaluate a firm differently if intercompany merchandise sales were not eliminated? Does that matter?