Question

Robert Fawx, an inventory control specialist, is interested in better understanding the accounting for inventories. Although Fawx understands the more sophisticated computer inventory control systems, he has little knowledge of how inventory cost is determined. In studying the records of Aaron Enterprises, which sells normal brand-name goods from its own store and on consignment through Gomez Inc., he asks you to answer the following questions.

Instructions
(a) Should Aaron Enterprises include in its inventory normal brand-name goods purchased from its suppliers but not yet received if the terms of purchase are f.o.b. shipping point (manufacturer's plant)? Why?

(b) Should Aaron Enterprises include freight-in expenditures as an inventory cost? Why?

(c) If Aaron Enterprises purchases its goods on terms 2/10, net 30, should the purchases be recorded gross or net? Why?

(d) What are products on consignment? How should they be reported in the financial statements?
(AICPA adapted)

Answer 1

1-	Yes Aaron enterprises should record the purchase as inventory because goods are shipped as FOB shipping point means as goods are delivered from seller point, sale is over on the part of seller and all risk are transferred to buyer so buyer is responsible for all the risk and ownership of goods has transferred to buyer.
2-	Yes Aaron enterprises should include all the freight in expenses in its cost of inventory because all the freight expenses would be paid by the buyer so it should be included in the cost of inventory
3-	Amount of purchase should be recorded at gross amount because condition of 2% would be applicable if the payment would be made in with n discount period and if payment will be made after the discount period so gross amount would be payable so it would be recorded at gross value
4-	consignment is arrangement of sale in which buyer get the possession of goods to be sold but ownership lies with the consignor and ownership would be transferred when goods are sold and then consignee would make the payment to the consignor. Goods on consignment would be recorded as inventory in the books of consignor