Question

An upstream sale of inventory is a sale:

A) between the subsidiaries owned by a common parent.
B) with the transfer of goods scheduled by contract to occur on a specified future date.
C) in which the goods are physically transported by boat from a subsidiary to its parent.
D) made by the investor to the investee.
E) made by the investee to the investor.

Answer 1

An upstream sale of inventory is a sale made by the investee to the investor, typically involving a subsidiary selling to its parent company.

Step-by-step explanation:

An upstream sale of inventory is a sale made by the investee to the investor. This means that a subsidiary company sells inventory to its parent company. These transactions are important in understanding how profits from such sales are reported in the consolidated financial statements of a parent company. When these sales occur, it's critical to eliminate any unrealized profits from the internal sale to avoid overstating the profit of the consolidated entity.

For instance, if a subsidiary sells inventory to its parent company at a profit, but the parent company has not yet sold this inventory to an external third party, the profit is considered unrealized from a consolidated perspective and must be eliminated in consolidation. This ensures that the financial statements only reflect profits from sales to external parties.