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Unformatted text preview: re (or are not) included in inventory. Technically, goods in
transit belong to the party holding legal ownership. Ownership depends on the F.O.B. terms. Goods
sold F.O.B. destination do not belong to the purchaser until they arrive at their final destination.
Goods sold F.O.B. shipping point become property of the
purchaser once shipped by the seller. Therefore, when
determining the amount of inventory owned at year end, goods
in transit must be considered in light of the F.O.B. terms. In the
case of F.O.B. shipping point, for instance, a buyer would need
to include as inventory the goods that are being transported but
not yet received. The diagram at right is meant to show who
includes goods in transit, with ownership shifting at the F.O.B.
point noted with a “flag.”
Another problem area pertains to goods on consignment.
Consigned goods describe products that are in the custody
of one party, but belong to another. Thus, the party holding
physical possession is not the legal owner. The person
with physical possession is known as the consignee. The
consignee is responsible for taking care of the goods and
trying to sell them to an end customer. In essence, the
consignee is acting as a sales agent. The consignor is the
party holding legal ownership/title to the consigned goods in inventory. Because consigned goods
belong to the consignor, they should be included in the inventory of the consignor -- not the
consignee! Download free ebooks at bookboon.com
22 The Components of Inventory Current Assets: Part II Consignments arise when the owner desires to place inventory in the hands of a sales agent, but the
sales agent does not want to pay for those goods unless the agent is able to sell them to an end
customer. For example, auto part manufacturers may produce many types of parts that are very
specialized and expensive, such as braking systems. A retail auto parts store may not be able to
afford to stock every variety. In addition, there is the real risk of ending up with numerous obsolete
units. But, the manufacturer desperately needs these units in the retail channel -- when brakes fail,
customers will go to the source that can provide an immediate solution. As a result, the
manufacturer may consign the units to auto parts retailers.
Conceptually, it is fairly simple to understand the accounting for consigned goods. Practically, they
pose a recordkeeping challenge. When examining a company’s inventory on hand, special care must
be taken to identify both goods consigned out to others (which are to be included in inventory) and
goods consigned in (which are not to be included in inventory). Obviously, if the consignee does
sell the consigned goods to an end user, the consignee would keep a portion of the sales price, and
remit the balance to the consignor. All of this activity requires a good accounting system to be able
to identify which units are consigned, track their movement, and know when they are actually sold
or returned. Download free ebooks at bookboon.com
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This note was uploaded on 06/07/2013 for the course BA 201 taught by Professor Cuongvu during the Fall '13 term at RMIT Vietnam.
- Fall '13