Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

5. Inventory

Physical Inventory Count, Ownership of Goods, and Consigned Goods

Financial Accounting

5. Inventory

Physical Inventory Count, Ownership of Goods, and Consigned Goods

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Multiple Choice

Which of the following are two primary reasons why some industries use consignment arrangements for inventory?

To increase the cost of goods sold and to accelerate revenue recognition for the consignee

To transfer legal title to the consignee immediately and to simplify accounting for the consignor

To allow suppliers to retain ownership until the goods are sold and to reduce the financial risk for retailers

To avoid physical inventory counts and to eliminate the need for inventory tracking

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Verified step by step guidance

Understand the concept of consignment arrangements: In a consignment arrangement, the consignor (supplier) retains ownership of the inventory until it is sold by the consignee (retailer). This means the consignee does not record the inventory as an asset on their books.

Identify the primary reasons for using consignment arrangements: These arrangements are typically used to reduce financial risk for the retailer and allow the supplier to retain ownership of the goods until they are sold. This benefits both parties by minimizing upfront costs for the retailer and ensuring the supplier retains control over unsold inventory.

Analyze the incorrect options: For example, increasing the cost of goods sold and accelerating revenue recognition for the consignee are not valid reasons for consignment arrangements. Similarly, transferring legal title immediately or avoiding physical inventory counts are not consistent with the purpose of consignment arrangements.

Focus on the correct answer: The correct reasons are 'to allow suppliers to retain ownership until the goods are sold' and 'to reduce the financial risk for retailers.' These align with the fundamental principles of consignment arrangements.

Summarize the reasoning: Consignment arrangements are designed to benefit both the consignor and consignee by reducing financial risk for the retailer and ensuring the supplier retains ownership of unsold goods, which simplifies inventory management and financial accounting.