In consolidation why are some inter-company profit deemed to be unrealized for one accounting period and realized in a subsequent accounting period?

Answer 1

I think that this may be answered as follows. Company A makes widgets; it sells some on the open market for a profit and sells some to another company (B) in the group for a (smaller) profit. Let us say that at the end of the financial year open market sales had a profit of £100 and profits on sales to company B were £250. However company B had only sold half of the widgets bought from Company A. In the consolidated accounts of the group company A2Z the profit on the sales from Co A to Co B had not been fully realised because Co B still had half the widgets on the shelf but the open market sales profit of £100 i fully realised. Taking the picture from a group point of view whole half the profits in Co A on the sales to Co B had not been earned by the group because not all the widgets had been sold by Co B; this profit £125 (half of £250) is unrealised. The next year, when Company B sells the widgets to third parties, the unrealised interco profit will be released