Can someone tell me if the calculations are the same for both?
We are trying to reduce the portion of unsold good from the investee in either cash (up or down stream).
Correct?
The calculation are close but there is a slight difference. In a downstream sale, you are correct. In an upstream sale, we need to remove the portion of unsold by the investor.
Suppose Investor owns 30% of investee.
Downstream sale :
Investor sells 100$ worth of goods to investee for 500$. By end of year, investee has sold 60% of the stock.
-
Initially : Investor profit = 500 - 100 = 400$
-
However, the investee still has 40% of the stock unsold (unconfirmed), the investor must remove it from its income : 40% unconfirmed * 400$ profit * 30% ownership = 48 $
=> Investor will report 400-48 = 352$ from this transaction
=> When investee will sell rest of goods, investor will recognize an additional 48 $
Upstream sale
Investee sells 100$ worth of good to investor for 500$. By end of year, investor has sold 60% of the stock.
-
Intially : Investor net income = 400$ profit of investee * 30% ownership interest = 120$.
-
However, the investor still has 40% of stock unsold (unconfirmed), the investor must remove it from its income : 40% unconfirmed* 400$ profit of investee * 30% ownership = 48$
=> Investor will report 120-48 = 72$ from this transaction
=> When investor will sell rest of goods, investor will recognize an additional 48 $
The difference between the two is basically the starting point which determines the max profit :
In downstream sale, investor sells the goods thus makes the greatest profit (400$ confirmed + unconfirmed)
In upstream sale, investee sells the goods thus investor makes lowest profit (400*0,3 = 120$ confirmed + unconfirmed)
I am yet to understand the idea in down stream sales. Sir s2000 magician please help me. Thanks in advance.