Question

You are the general ledger accountant at a small health food merchandiser. It is your responsibility to make sure the entries into the general ledger are correct, record ending inventory, and calculate cost of goods sold every month. The company performs a physical inventory at the end of every month so that you can verify that the ledger accounts are correct. You remember from accounting class that ending inventory is not just the inventory in the warehouse but also any inventory on consignment and in transit. With this in mind, you request all sales and purchase invoice for the last 5 days of the month so that you can research if anything needs to be added or taken out of inventory. Your receivable accountant is annoyed and tells you, “You are creating more work for all of us with this request. I have other things to do then compile these invoices for you. Don’t you know that that all products that are shipped are not our inventory.” But he has provided you all the invoices by the end of the day. As you are looking into the invoices you notice that several of the invoices say, “Shipped but will be returned.” What does that mean? You inquire about the note on the invoices and are told that we ship some products FOB Shipping Point but we know that they will refuse the product and send it back. This is an odd practice and you are not sure it is ethical.

What do you do and why?

Note: I essentially have to write a short essay about this ethical issue; however, I am having a hard time understanding the accounting information in the problem. Thus, I don't understand the ethical dilemma. I know that there is no correct answer, however I need some guidance and clarity on what the accounting information means in order to fully answer the question. Thank you!

Answer 1

The practice in unethical on the ground that risk of transit is transferred to the Buyer and apparently there is no agreement as to same which is very clear from the fact that "Shipped will be returned" note is put in such movements.

With this state of delivery there is clearly a violation of Customer Contract condition of Revenue Recognition.Also there is a clear cut certainity of "Delivery not getting complete" hence at the very first point Sales should not be recognized in such cases but only on successful acceptance by the Customers.Acceptance by customer of delivery is completion of the obligation and also etsablishes certainity of collection.

Recognizing such Sales distorts the books of accounts and donot give True and Fair view.

Hence this practice should be discontinued and if not then Sales Revenue not to be recognized and Inventory not to be depleted to have a True and Fair accounts.