The legal title to the merchandise in transit on the

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The legal title to the merchandise in transit on the inventory date is known by examiningpurchase and sales invoices of the last few days of the current accounting period and the first fewdays of the following accounting period. This legal title depends on shipping terms (agreements).There are two main types of shipping terms. FOB shipping point and FOB destination(1)FOB shipping point- the ownership title passes too the buyer when the goods are shipped(when the goods are loaded on the means of transportation, i.e. at the seller’s point). Thepurchaser is responsible for freight charges.(2)FOB destination– the title passes to the buyer when the goods arrive at their destination,i.e. at the buyer’s point.So, in general, goods in transit purchased on FOB shipping point terms are included in theinventories of the buyer and excluded from the inventories of the buyer and excluded from theinventories of the seller. And goods in transit purchased on FOB destination terms are included inthe inventories of the seller and excluded from the inventories of the buyer.There are also a problem with goods on consignment at the time of taking and inventory. Goodson consignment to another party (agent) called the consignee. A Consignee is to sell the goodsfor the owner usually on commission are included in the consignor’s inventories and excludedfrom the consignee’s inventories.PRACTICE EXERCISEA. Short answer questions1.Define inventories2.From the two inventory systems, which method is better considering internalcontrols?3.If ending inventory is misstated, it will not have an effect in the owners’ equity of thefollowing period. Why?B. Workout questions2.Abera Company reported annual net income as follows2000Br. 151,4002001152,40010
112002128,120Analysis of its inventories shows that the following incorrect inventory amounts were used (thecorrect amounts are also shown)Incorrect inventoryCorrect inventoryAmountAmountDecember 31,2001Br. 24,000Br. 28,000December 31,200127,00023,000Compute the annual net income for each of the three years assuming the correct inventories hadbeen used.3. Condensed income statement for FANTU Supermarket for two years are shown below:19 x 419 x 3Sales (net)Br. 126,000Br. 105,000Cost of Goods Sold75,00054,000Gross MarginBr. 51,000Br. 51,000Operating Expenses30,00030,000Net IncomeBr. 21,000Br. 21,000After the end of 19 x 4 it was discovered that an error had resulted in a Br. 9000 understatementof 19 x 3 ending inventory.Required:Computea)the corrected net income for 19 x 3b)the corrected cost of goods sold for 19 x 4c)the corrected net income for 19 x 4d)what effect will the error have on net income and ending owner’s equity for 19 x5?4. The following information is related to the business for three consecutive fiscal years.19 x 319 x 219 x 1Net salesBr. 430,000Br. 425,000Br. 400,000Cost of goods sold240,000243,000240,000Gross Profit189,200182,000160,000

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Term
Fall
Professor
FERRELL
Tags
Physical inventory

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