Multiple Choice
Which of the following best describes the purpose of taking a physical count of inventory at the end of an accounting period?
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5. Inventory
Physical Inventory Count, Ownership of Goods, and Consigned Goods
Multiple Choice
When taking a physical count of inventory at year-end, which of the following items should be included in the company’s inventory balance?
A
Goods sold FOB shipping point that are still on the company’s loading dock waiting to be shipped
B
Goods sold FOB destination that are in transit to the customer at year-end
C
Goods owned by a supplier that are stored in the company’s warehouse but have not yet been purchased
D
Goods held on consignment from another company (goods owned by the consignor)
Verified step by step guidance1
Step 1: Understand the concept of inventory ownership and the terms FOB shipping point and FOB destination. FOB (Free On Board) shipping point means ownership transfers to the buyer once the goods leave the seller's premises, while FOB destination means ownership transfers only when the goods reach the buyer's location.
Step 2: Identify which goods should be included in inventory based on ownership at the balance sheet date. Only goods that the company legally owns at year-end should be included in the inventory balance.
Step 3: Analyze each item:
- Goods sold FOB shipping point on the loading dock are already owned by the buyer once shipped, so they should not be included in the seller's inventory.
- Goods sold FOB destination in transit are still owned by the seller until they reach the buyer, so they should be included in the seller's inventory.
- Goods owned by a supplier but stored in the company's warehouse are not owned by the company, so they should not be included.
- Goods held on consignment are owned by the consignor, not the company holding them, so they should not be included.
Step 4: Apply the principle that inventory includes only goods owned by the company at the balance sheet date, regardless of physical location.
Step 5: Conclude which items meet the criteria for inclusion in inventory based on ownership and shipping terms.
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