In the case of human relations, marriages occur frequently. Once the business combination occurs, the assets and liabilities of the company become one. This is the same when a parent company buys a subsidiary corporation. You have noticed in your reading that intercompany transfers must be adjusted. With this in mind, please answer the following questions:

• Why are adjustments necessary for intercompany transfers?
• What are some ways the financials would be misstated if these intercompany transfers were not adjusted?
• Provide an example on how a firm could manipulate the firm’s financial position and how these intercompany entries fix this problem.

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