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Chapter 6: Problem 3

Identify Goods to Be Included in Inventory Lisa Company has the following items at year-end. Identify which items should be included in Lisa's year-end inventory count. 1\. Goods held on consignment by Sell For You Company. 2\. Goods held by Lisa on consignment that will be sold for another company. 3\. Goods in transit sent to a client F.O.B. shipping point. 4\. Goods in transit sent to a client F.O.B. destination.

Short Answer

Expert verified
Include goods consigned by Sell For You Company, and goods in transit FOB destination.

Step by step solution

01

Understanding Consignment Inventory

In consignment inventory, goods held by one party (the consignee) are actually owned by another party (the consignor). The goods held on consignment by Sell For You Company are Lisa's goods that are being sold by Sell For You. Therefore, they should be included in Lisa's inventory. Conversely, goods held by Lisa on consignment that will be sold for another company do not belong to Lisa and should not be included in her inventory.
02

Evaluating FOB Shipping Point

When goods are shipped FOB shipping point, ownership transfers to the buyer as soon as the goods leave the seller's location. Therefore, goods in transit sent to a client FOB shipping point have already transferred ownership to the client and should not be included in Lisa's year-end inventory.
03

Evaluating FOB Destination

When goods are shipped FOB destination, ownership remains with the seller until the goods reach the buyer's location. Therefore, goods in transit to a client FOB destination should still be included in Lisa's inventory until they reach the client.

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Key Concepts

These are the key concepts you need to understand to accurately answer the question.

Consignment Inventory
Consignment inventory is a unique arrangement between two parties鈥攖he consignor and the consignee. The consignor is the owner of the goods, while the consignee holds and sells these goods on behalf of the consignor. This means that consignor remains the owner until the goods are sold. Thus, the goods remain in the consignor's inventory.

This system offers significant advantages:
  • The consignor can reach broader markets without forming new sales infrastructures.
  • The consignee doesn't need to purchase the goods up-front, reducing financial risk.
Lisa Company should include goods it owns, even if they are on consignment elsewhere, in its inventory count. Conversely, goods Lisa holds for other companies shouldn't be counted as part of Lisa's inventory as they belong to the consignor, not Lisa.
FOB Shipping Point
'FOB' stands for 'Free On Board,' and the term specifies when the ownership of goods changes hands in the shipping process. With FOB Shipping Point, that moment occurs when goods leave the seller's location. From that point forward, the buyer assumes ownership and responsibility for the goods.

This has important implications for inventory management:
  • Once shipped, goods are the buyer's to include in their inventory, even if still in transit.
  • The seller should remove the goods from their inventory count once shipped.
For Lisa Company, any goods shipped under FOB Shipping Point terms should not be included in her year-end inventory once they are dispatched to the client.
FOB Destination
In contrast to FOB Shipping Point, FOB Destination terms indicate that the seller retains ownership while goods are in transit. The transfer of ownership to the buyer only occurs when the goods reach the buyer's location.

For businesses, this means:
  • The seller keeps these goods in their inventory until delivery is complete.
  • Risks associated with transit remain with the seller until the buyer receives the goods.
If Lisa Company ships goods under FOB Destination terms, those goods should remain in her inventory until the client actually takes possession.
Ownership Transfer
Ownership transfer is the critical point where the legal rights and responsibilities of goods shift from one party to another. This concept is crucial for determining who includes the goods in their end-of-year inventory.

Key moments for inventory consideration include:
  • Consignment arrangements, where ownership stays with the consignor until sold.
  • FOB terms that dictate transfer points either at shipping or delivery.
Understanding these principles ensures accurate financial records. For Lisa Company, goods not yet transferred should remain in her inventory, aligning with the correct ownership status at year-end.

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Most popular questions from this chapter

Which inventory costing method does not require the use of the lower-of-cost- or-net realizable value method? a. Specific identification b. Weighted-average cost c. FIFO d. All methods require the use of LCM.

Just-in-Time Inventories Nevada Manufacturing Company uses the perpetual inventory system and plans to use raw material costing \(\$ 2,100,000\) in making its products. Nevada will operate its factory 300 days during the year. Currently, Nevada follows the just-in-case philosophy with its raw materials inventory, keeping raw materials costing \(\$ 20,000\) in its raw materials inventory. Nevada plans to switch to the just-in-time manufacturing philosophy by keeping only the raw materials needed for the next two days of production. Calculate the new raw materials inventory level after Nevada implements the just-in-time manufacturing philosophy.

Describe how each of the following inventory costing methods is used with the perpetual inventory system: (a) Specific identification; (b) Weighted-average cost; (c) First-in, first-out; and (d) Last-in, first-out.

Applying IFRS The French Petroleum Company is a Paris-based oil and gas company that prepares its financial statements using IFRS. During the year, the management of the company undertook a review of the fair value of its oil and gas inventory and found that the inventory had appreciated above its book value of 55 million euros. According to the company's management, the oil and gas inventory was undervalued by 8 million euros. Prepare the journal entry to revalue the company's inventory. (Hint: Credit Asset, revaluation reserve.) How would the revaluation immediately affect the company's (a) current ratio, (b) inventory turnover, and (c) days \({ }^{+}\)sales in inventory?

If costs have been rising, which inventory costing method-weighted-average cost; first-in, first-out; or last-in, first-out-yields (a) the lowest ending inventory value? (b) the lowest net income? (c) the largest ending inventory value? (d) the largest net income?
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