intercompany transaction
A financial transaction between entities within the same corporate group, which must be eliminated when preparing consolidated financial statements.
Example
“The $100M sale from parent to subsidiary was eliminated as an intercompany transaction in consolidation.”
Memory Tip
INTERCOMPANY transaction = deals within the same corporate family. Must be eliminated in consolidation.
Why It Matters
Understanding intercompany transactions helps investors and stakeholders accurately assess a company's true financial performance and profitability. When these internal transactions are not properly eliminated, consolidated financial statements can misrepresent the actual revenues and expenses generated from external customers, affecting investment decisions and credit evaluations.
Common Misconception
Many people believe that intercompany transactions represent real business activity that should be counted in consolidated financial statements. In reality, these transactions are merely internal transfers of money and goods between different parts of the same company family, and including them would result in double-counting revenue and inflating the overall size of the business.
In Practice
Imagine Company A (parent) sells inventory to Company B (subsidiary) for 100,000 dollars at a markup. If these companies report separately, combined revenues would show 100,000 dollars from this sale, but when consolidated, this transaction must be eliminated because no external customer was involved. The consolidated statement would only recognize the markup as profit once Company B sells the inventory to an outside customer.
Etymology
INTER- (between) COMPANY (corporate entity) TRANSACTION. A transaction BETWEEN companies in the same group.
Common Misspellings
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Related Terms
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See Also
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