What is included in equity income when upstream sales are made to the parent company?

The correct answer highlights that equity income includes unrealized profit when the goods sold to the parent company are subsequently sold to a third party. In the context of upstream sales, which occur when the associate sells goods to the parent, any profit generated on that sale is not recognized in the parent's consolidated financial statements until the goods have been sold to an external party. This is because the profit is considered unrealized until the final sale occurs outside the corporate structure.

Unrealized profits arise in such transactions because the parent company receives goods at a marked-up price from the associate but has not yet sold those goods to an outside entity. Therefore, the realization of this profit hinges on the parent company completing the sale to a third party. When that occurs, the unrealized profit becomes realized, and the parent's financial statements can reflect this profit appropriately.

Other possible answers do not accurately capture the mechanics of equity income and unrealized profits in upstream transactions. For instance, unrealized profits at the point of recognition or total revenues from associates do not directly address the implications of the sale to the parent versus external customers. Hence, understanding that the timing of profit realization is crucial in accounting for equity income is essential in these scenarios.