Multiple Choice
When performing a physical count of inventory at year-end, which of the following items should be included in the entity’s ending inventory balance?
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5. Inventory
Physical Inventory Count, Ownership of Goods, and Consigned Goods
Multiple Choice
In the context of a physical inventory count and determining ownership (including goods in transit and consigned goods), which of the following is NOT a type of inventory that would be reported by a merchandising company?
A
Goods in transit (owned by the company)
B
Consigned goods held for others
C
Prepaid insurance
D
Merchandise inventory
Verified step by step guidance1
Step 1: Understand the types of inventory typically reported by a merchandising company. These include goods that the company owns and intends to sell, such as merchandise inventory, goods in transit (if ownership has passed to the company), and consigned goods held for others (which are not owned by the company and thus not reported as inventory).
Step 2: Identify the nature of each item listed: 'Goods in transit (owned by the company)' are included because ownership has transferred; 'Consigned goods held for others' are not owned by the company and therefore not included in inventory; 'Merchandise inventory' is the primary inventory account for goods held for sale.
Step 3: Recognize that 'Prepaid insurance' is not a type of inventory. It is an asset representing payments made in advance for insurance coverage and does not relate to goods held for sale.
Step 4: Conclude that among the options, 'Prepaid insurance' is the item that would NOT be reported as inventory by a merchandising company because it is a prepaid expense, not inventory.
Step 5: Summarize that inventory reporting focuses on goods owned and held for sale, excluding prepaid expenses and goods held on consignment for others.
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