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Consolidated financial statements I

Provision for unrealised profits (PURP)

If a parent and subsidiary sell to each other and the goods still remain in the group
we must adjust the group profit and inventory so that it is stated at original cost to the
group.

The PURP is calculated using either the mark-up or margin method.

Mark-up (cost plus)
Margin
Profit is based on cost and
Profit is based on selling price
calculated by taking the selling and calculated by taking the
price of closing inventory divided profit % of selling price of closing
by 100 + profit % and multiplied inventory e.g. Inter-company
by the profit % e.g. Inter- sales of $12,000, all remained in

company sales of $12,000, all
inventory at the year end and
remained in inventory and has had been sold at a margin of
been sold at a mark-up of 20% = 20%= $12,000 × 20% = PURP
$12,000/120 × 20 = PURP of of $2,400.
$2,000.

The adjustment:

 Decrease inventory.

 Decrease group reserves (W5) if the parent made sale or

 Decrease net assets at the reporting date (W2) if the subsidiary made sale

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