Which method is NOT a valid approach for determining a transfer price?

The approach of using a price set by Generally Accepted Accounting Principles (GAAP) is not a valid method for determining a transfer price. GAAP provides guidelines for how financial statements should be prepared and presents a framework for reporting financial performance, but it does not specify methods for setting transfer prices between divisions of a company. Transfer pricing is a managerial decision that reflects the value of goods or services exchanged between parts of an organization for internal reporting and operational objectives.

The other methods mentioned are widely recognized techniques for setting transfer prices. Using the market price approach reflects what the product or service would fetch in the open market, ensuring competitive pricing. A negotiated price allows the seller and the buyer within the organization to come to a mutually agreeable price, which can consider the needs and strategic goals of both parties. Using a defined cost approach establishes the transfer price based on the cost incurred to produce goods or services, which can ensure cost recovery or profitability targets are met. These methods are valid because they directly address the operational roles of transfer pricing in managing intercompany transactions and financial performance.