Question

Question:Presented below is a list of items that may or may not be reported as inventory in a company’s December 31 balance sheet.

1. Goods out on consignment at another company’s store.

2. Goods sold on an installment basis (bad debts can be reasonably estimated).

3. Goods purchased f.o.b. shipping point that are in transit at December 31.

4. Goods purchased f.o.b. destination that are in transit at December 31.

5. Goods sold to another company, for which our company has signed an agreement to repurchase at a set price that coversall costs related to the inventory.

6. Goods sold where large returns are predictable.

7. Goods sold f.o.b. shipping point that are in transit at December 31.

8. Freight charges on goods purchased.

9. Interest costs incurred for inventories that are routinely manufactured.

10. Costs incurred to advertise goods held for resale.

11. Materials on hand not yet placed into production by a manufacturing firm.

12. Office supplies.

13. Raw materials on which a manufacturing firm has started production but which are not completely processed.

14. Factory supplies.

15. Goods held on consignment from another company.

16. Costs identified with units completed by a manufacturing firm but not yet sold.

17. Goods sold f.o.b. destination that are in transit at December 31.

18. Short-term investments in stocks and bonds that will be resold in the near future.

Instructions

Indicate which of these items would typically be reported as inventory in the financial statements. If an item should not bereported as inventory, indicate how it should be reported in the financial statements.

Short answer

Only items 1, 3, 8, 11, 13, 16, and 17 would be reported as inventory in the financial statement.

Step-by-step solution

Step-by-step-solution Step 1: Goods out on consignment at another company’s store.

When the goods are sold on a consignment basis, the legal title and the ownership still remain with the seller (consignor) and the consignee remains without any liability except for due care and protection from loss.

So, in this case, the sales would not be recognized unless the consignee reports sales to the consignor. Till then, the goods sent to consignment would be a part of the inventory and would be included in the financial statement.

Step 2: Goods sold on an installment basis (bad debts can be reasonably estimated).

On the installment basis of sales, the title and ownership are transferred to the third party. Thus the goods sold on installmentwould be recognized as COGS and would not be included in the inventory.

Step 3: Goods purchased f.o.b. shipping point that are in transit at December 31.

In the f.o.b. shipping point, the title is generally transferred to the purchaser at the time of shipping the goods and the common carrier acts as an agent for the purchaser. Thus in this case the goods would be recognized in the financial books of the company.

Step 4: Goods purchased f.o.b. destination that is in transit at December 31.

In the f.o.b. destination, the title still remains with the seller until the goods are received by the buyer. So, in this case, the inventory would not be recorded unless the goods are received.

Step 5: Goods sold to another company, for which our company has signed an agreement to repurchase at a set price that covers all costs related to the inventory.

A sale repurchase agreement is an arrangement of arranging finance by making an implicit or explicit repurchase agreement for inventory. In this case, the title is transferred to the seller until repurchase. Thus the goods sold would be recognized as COGS and would not be part of the inventory.

Step 6: Goods sold where large returns are predictable.

In this case, the goods are sold with the agreement that the buyer may return the goods for a full or partial return. So under this case, generally the sales are recognized for the expected revenue, and an estimated inventory return account is established for the possible return of goods.

Step 7: Goods sold f.o.b. shipping point that is in transit at December 31.

In f.o.b. shipping point the title and ownership is transferred to the buyer at the time of shipping the goods. So the goods sold would be recognized as COGS and would not be part of the inventory.

Step 8: Freight charges on goods purchased.

Freight charges on goods purchased would be a part of the inventory value and would be added back to the cost of the inventory.

Step 9: Interest costs incurred for inventories that are routinely manufactured.

For routinely manufactured goods, interest cost would be part of the period cost. This cost is not directly related to the inventory but is incurred to make the inventories ready for sale.

Step 10: Costs incurred to advertise goods held for resale.

This is a period cost and is not directly related to the inventory. So it would not be included in the inventory.

step 11:Materials on hand not yet placed into production by a manufacturing firm.

Materials on hand at the beginning of the production are the beginning raw materials. This would be the part of the available raw material for production and only those materials would be reported as inventory (raw material) which are left from introducing to the production process.

Step 12: Office supplies.

Office supplies are non-production supplies and would be reported under the current asset section but not under inventory.

Step 13: Raw materials on which a manufacturing firm has started production but which are not completely processed.

Inventories are classified under three heads – raw materials, work-in-progress, and finished goods. So the raw materials used in production but not yet finished would be part of the inventory under the WIP head.

Step 14: Factory supplies.

Factory supplies are the essentials for the production process but not part of the inventory. It is the current asset for the company and would be reported in the balance sheet

Step 15: Goods held on consignment from another company.

Goods held on consignment do not transfer title and controlling rights. Thus it would not be recorded as inventory. It would be reported as consigned goods.

Step 16: Costs identified with units completed by a manufacturing firm but not yet sold.

Units completed but not sold are part of the finished goods. It will be reported as inventory under the heads “finished goods”.

Step 17: Goods sold f.o.b. destination that is in transit at December 31.

Under the goods sold on f.o.b destination, the title still remains with the seller until the goods are received by the buyer. So it would be reported as inventory on December 31, in the books of accounts

Step 18: Short-term investments in stocks and bonds that will be resold in the near future.

Investment in short-term securities is not part of the inventory. It would be classified as current assets and would be reported in the balance sheet under the current asset section.