Question

1. You are an accounting student at Berkeley College and will not graduate for another year. But because of your excellent grades so far, you have been able to land a job in the purchasing department of a retailer. One of the purchasing agents in your company is negotiating for the receipt of a very large order of uninsured goods from a supplier. The purchasing agent is able to get a better deal on the goods if they are shipped FOB shipping point rather than FOB destination. The agent doesn’t know the difference between these two concepts. He also doesn’t understand why choosing one over the other should make any difference to the company. As a student of accounting at Berkeley College, you know well the difference between these 2 concepts and you know why one would be a better choice over the other in the case of uninsured goods. Please explain these two concepts in this discussion and tell the purchasing agent which shipping method is preferable and why. In addition to your response, please comment to at least one classmate’s post including information from Chapter 6 in your eText.

2. Explain the difference between the Perpetual and Periodic inventory systems and let us know why anyone would use Periodic inventory in this computerized age.

Answer 1

Requirement 1

FOB shipping point specifies that the title of goods is shifted from the seller to the buyer when the goods are positioned on a delivery vehicle. On the contrary, FOB destination specifies that the title of goods handovers from the seller to the buyer when the goods are transported to the buyer's destination.

Since FOB shipping point handovers the title of the shipment of goods when the goods are positioned at the shipping point, the legal title of those goods is conveyed to the buyer. Therefore, the seller is not accountable for the goods throughout delivery. However, in the case of uninsured goods, this option is not operative because the goods may be misplaced during the delivery and the buyer won’t receive any reimbursement for the loss. On the contrary, with FOB destination, the title of ownership is typically transported at the buyer’s office building. Once the goods are delivered to the buyer’s specified location, the title of ownership of the goods transfers from the seller to the buyer. Consequently, the seller legally owns the goods and is responsible for the goods during the shipping process. This option is much more effective in the case of uninsured goods because the buyer doesn’t need to worry about the goods during delivery.

Requirement 2

A Perpetual inventory system is an inventory system where the alterations to inventory are reorganised constantly all through the accounting period through the Inventory and cost of goods accounts. The perpetual inventory system permits for instant updates to changes in inventory, thus, is an precise scheme of trailing inventory balance or providing an current report of the inventory amounts. The system amounts reproduce the inventory on hand all the time. However, companies are obligatory to frequently do a physical count of inventory to match the correctness of the balance of inventory in the system. The difference in inventory balance could arise due to stealing or damages.

A perpetual inventory system is used by big companies that are typically branded by a large volume of inventory transactions and with enough capital to set up and employ a large number of employees to activate the perpetual inventory system.

Under a periodic inventory system, inventory and cost of goods accounts sold are only reorganized at the end of the accounting period after the physical inventory count has been done. The company only trails the beginning and ending inventory within an accounting period. The cost of goods sold and inventory accounts are not maintained under this system but are updated only after a physical inventory count at the end of each period.

Companies can still use the periodic inventory system in this computerized age in circumstances where those companies are dealing with few inventory items such as car dealers or grocery stores or don't have enough capital to install the perpetual system.