P FULL SCREEN PRINTER VERSON 4SACK CAS2 Inventoriable Goods

P:, FULL SCREEN PRINTER VERS?ON 4SACK CAS-2. Inventoriable Goods and Costs) Clay Mattews, an inventory control specialist, is interested in better understanding the accounting for imventories Although Enterprises, which sells normal brand-name goods from its own store and on consignment through Chavez Inc,he asks you to sophisticated computer inventory control systems, he has little knowledge of how inventory cost is determined. In studying the records of Strider anver the following questions. Instructions (a) Should Strider Enterprises include in its inventory normal brand-name goods purchased from its suppliers but not yet recerved if the terms of purchase are fo b. shipping point (manufacturer\'s plant)? Why? (b) Should Strider Enterprises include freight-in expenditures as an inventory cost? Why? (e) If Strider Enterprises purchases its goods on terms 2 10, net 30, should the purchases be recorded grossor net? W (d) What are products on consignment? How should they be reported in the financial statements? (AICPA adapted)

Solution

a.Yes, they should include the goods in transit in their inventory. The Reason for this is because the shipping terms specify that the buyer retains ownership of the goods once the goods leave the shipping dock. There are two ways in which freight charges influence the date when the ownership of goods changes. With f.o.b. shipping point the buyer is responsible for the transit of the goods to their destination and the ownership of goods is transferred to the buyer once the goods are loaded from the shipping dock. With f.o.b. destination the goods are ‘free on board’ until they reach their destination. This means that the seller is responsible for delivering the goods and ownership does not change until they reach their destination. In this case the goods were shipped f.o.b shipping point, so they should be included in the inventory once they have been removed the supplier.

b.Yes, Strider Enterprises should include freight-in expenses as an inventory cost. Freight-in costs are the costs associated to bringing goods to the buyer’s place of business. As such, they are as much a part of the cost of the goods as the buying price. These costs are product costs, they include any cost associated with transporting the goods, and any costs for processing the goods until they are sold. Since freight-in costs are directly related to the cost associated with selling the goods and should be include as an inventory cost.  

c.The answer to the question depends on which method Strider has employed to date. Both methods are acceptable under GAAP and each one has its own advantages and disadvantages. The gross method reports the entire cost of the goods and then reports the discounts when they are earned. The net method records the purchase price less the discounts on the date the goods were purchased. Then if the purchase discounts were lost it discloses the loss in as a financial expense and in the “Other expenses and losses” section instead of in the “Purchases” section of the Income Statement.  

d.Products on consignment represent inventories owned by strider enterprises , which are physically transferred to another wnterprise.The tiltle of goods however remains with strider enterprise until the sale is made by the other company

The goods consigned are still included by strider enterprises in the inventory section of its balance sheet.Often the inventory is reclassified from regular inventory to consigned inventory