Question

Clay Mattews, an inventory control specialist, is interested in better understanding the accounting for inventories. Although Clay understands the more sophisticated computer inventory control systems, he has littleknowledge of how inventory cost is determined. In studying the records of Strider Enterprises, which sells normal brand-namegoods from its own store and on consignment through Chavez Inc., he asks you to answer the following questions.

Instructions

(a) Should Strider Enterprises include in its inventory normal brand-name goods purchased from its suppliers but not yetreceived if the terms of purchase are f.o.b. shipping point (manufacturer’s plant)? Why?

(b) Should Strider Enterprises include freight-in expenditures as an inventory cost? Why?

(c) If Strider Enterprises purchases its goods on terms 2/10, net 30, should the purchases be recorded gross or net? Why?

(d) What are products on consignment? How should they be reported in the financial statements?

Short answer

Purchase on shipping point must be recorded. Freight in expenses must be included in the inventory, and the goods on consignment should not be reordered. The preferred method of purchase recording is the gross method.

Step-by-step solution

Purchased on f.o.b. shipping point

At f.o.b. shipping point, the title of the goods is transferred on shipping the goods. Thus the goods have been assumed to be in the control of the buyer. In this case, there should be a recording of the inventory purchase on the date of shipping. And the goods must be included in the ending inventory irrespective of the fact that the goods have not been received.

Freight in expenditure

Freight in expenditure is the costs that are incurred for acquiring the goods. These are the costs that are related to the transportation of the goods purchased. According to the inventory accounting standard, all the costs directly related to the acquisition of the goods must be included in the cost.

So per these standards, the freight cost would be included in the purchased inventories.

Net vs. Gross method of inventory recording

The gross method of inventory recording reflects the inventories at their original cost without subtracting any cash discount. However, under net methods, goods are shown on their net amount irrespective of whether the discount has been earned or not.

Thus the gross method is more conservative than the net method. So priority should be given to the gross method. However, any method can be adapted to record the purchases.

Products on consignment

Product on consignment is the gods taken on the agency to sell them to customers. Under this system, the agent does not take possession or title of the goods but acts as an agent on behalf of the seller to sell the goods. So there is no liability on the consignor.

In the financial statement, goods taken on consignment are not shown in any of the statements. The only commission received on selling the goods is recorded.