Unrealised Profit- whether to add or deduct from cost of sales??

FF1982

Hi All,

I'm stuck & confused because of conflicting learning materials. How to adjust for unrealised profit in the Consolidated statement of comprehensive income. I've been using Kaplan book and it appears that the amount of unrealised profit is added to cost of sales however, whilst doing AAT sample assessment 2 I've noticed that the amount of unrealised profit is actually deducted from cost of sales.

To deduct the amount is more logical to me. As this represents some of the goods that have not been sold yet, that remain in inventory. Basically profit that you expect but not received yet....I hope I'm correct because that's how I understood it!!


Can someone kindly clarify, I'm sitting my exam very soon. I'm lacking confidence at the moment

CeeJaySix

Essentially the value of stock in the balance sheet is overstated, as the receiving company will have recorded it at the purchase cost from the selling company, where the margin was applied (so the profit is recognised in the selling company).

Therefore you need to credit stock in the SoFP to reduce the value, and by following through the debit must be to CoS.

Closing stock is a credit in the SoCI - you need to reduce this, confirming that it should be a debit to CoS as above.

As further confirmation, CoS is now increased, which reduces profit - this is what you want to do as you're stripping out the profits unrealised at group level.