Question

Included in the inventory count were goods with a cost of $11,000, which were waiting to be picked-up by the freight company for delivery to a customer. The terms were 1/10 net 30, FOB shipping. The goods had been invoiced to the customer on December 31, 2018 at $14,000.What are the key financial reporting issues? Where possible. What is the potential impact of the issue on the balance sheet and income statement, and explain why an adjustment is required? If there are areas where judgment is involved, or the accounting treatment is not clear. What are the alternatives that are available and factors that need to be considered in choosing an alternative?

Answer 1

Answer

Under FOB shipping terms the title of the shipment of goods transfers to the buyer when the goods are placed at the shipping point, i.e when the goods are placed on a delivery vehicle

In the extant case althogh the Invoice has been raised the actual sales has not taken place on 31 December 2018 since goods were not placed at the shipping point till 31st Dec 2018. Hence, the company should not recognize the revenue the revenue of $14,000. in the year ended 31 December 2018 and the cost of $11,000 of these goods should be included in ending Inventory,

Impact of financial statements:

Sales will decrease by $14,000 consequently Accounts receivable will decrease by  $14,000

Cost of goods sold will decrease by $11,000 with the corresponding increase in ending inventory of $11,000

Net income will decrease by ($14,000 -$11,000) =$3,000 which will lead to corresponding decrease in balance of Retained earnings (income tax impact ignored)

There will be no change in Accounts Payable