Question

a) company A pays for FOB shipping, company B does record purchase but doent record the item in the inventory becuase it hasnt arrived yet. b) Company A pays for FOB destination, Company B does record purchasebut doesnt record the item in the inventory because it hasnt arrived yet. fill O=OVERSTATED, U = UNDERSTATED, NA = not affected for assets, equity, net income, and cost of goods sold.

Answer 1

a.
In case of FOB shipping the purchaser would record the inventory once the goods are shipped by the seller
In this case seller has shipped the goods and thus inventory will need to be report even though it has not arrived
the impact of this is shown below
	Equity	Net income	Cost of goods sold
a.	U	U	O
If inventory is not recorded then cost of goods sold would be higher and thus net income would be lower.
Lower net income would result in understated equity as net income is transferred to equity through retained earnings.
b.
In case of FOB destination, the inventory is not recorded when the inventory reach the destination of purchaser
In this case goods have been shipped by A but B has not yet received and thus inventory would not be reported.
Company B should also recognize purchase when goods reach the destination and not before that
The effect of recording purchase is shown below
	Equity	Net income	Cost of goods sold
b.	U	U	O
Company has recorded purchases and thus cost of goods available for sale would be higher, which would increase cost of goods sold
Cost of goods sold would be overstated and net income and equity would be understated