Question

true or false-

1. Goods purchased, shipped FOB shipping point, and in transit should be included in the purchasers year end inventory.

2. In a period of changing prices, the consistency principle prohibits a company from changing to a more favorable inventory cost method.

Explain reason in detail.

Answer 1

Question 1: Goods purchased, shipped FOB shipping point, and in transit should be included in the purchasers year end inventory.

Answer 1: As per my view, the related question is not complete because they have not given the details regarding the transfer of ownership and when it has been transfered, this point becomes more important because this is the deciding factor about in whose inventory the goods to be included. So,if the goods are shipped FOB shipping point control of the goods is transfered to the buyer at the shipping point the related goods to be included in purchaser inventory and if the control of the goods are not transfered to the buyer at the shipping point the related goods to be included in seller inventory.

So, the answer to this question depends upon the control of goods and its transfer.

So, regarding the above question if the control of goods is transfered then it is true or vice-versa.

Question 2: In a period of changing prices, the consistency principle prohibits a company from changing to a more favorable inventory cost method.

Answer 2: Inventory valuation methods are a good example of an accounting method that companies usually change at some point in their history. Each method has a slightly different outcome depending on what management is trying to accomplish.For instance, LIFO raises cost of goods sold expense because higher value inventory is sold off first. This decreases income and inventory levels. Companies in high tax brackets often use LIFO to decrease their taxable income.FIFO, on the other hand, tends to increase income and inventory levels because lower value inventory is sold off first. The lower cost of goods sold recognized allows the company to show a higher net income than if it used LIFO.Companies can change from using LIFO to FIFO or vise versa and still be in agreement with the consistency principle. A one-time change isn’t prohibited. Companies cannot, however, change to LIFO in one year in order to minimize taxes, change to FIFO the following year to appeal to lenders, and change back to LIFO the year after that to minimize taxes again.This type of back and forth causes the financial statements to be incomparable and useless for trend analysis.

So, regarding the second question the conclusion is the Consistency principle do not prohibit a company from changing to a more favourable inventory cost method only when the reason is infrequent and justifiable.

So,the answer is No.

Thank you.