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Chapter 8

Management and Organizational Studies 3360A/B Chapter Notes - Chapter 8: Consignor, Consignee, Common Carrier


Department
Management and Organizational Studies
Course Code
MOS 3360A/B
Professor
Stacey Hann
Chapter
8

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Chapter 8 Inventory
UNDERSTANDING INVENTORY
What types of companies have inventory?
As a general rule, companies in industries such as manufacturing, retail and wholesale
often have a significant amount of inventories
Inventory Categories
Merchandise inventory merchandise in a form that is ready for sale, and unsold units
left on hand at each reporting data
o For retail companies
o Generally, not physically altered by purchasers
Manufacturing companies have inventory in various stages: raw materials, work in
process, and finished goods
Raw materials inventory amounts of goods and materials that are on hand but have no
yet gone into production
o E.g. wood to make a baseball bat
o These materials can be traced to the end product
Work-in-process inventory the cost of raw materials on which production has started
but is not yet complete plus the direct labour cost applied specifically to this material and
its applicable share of manufacturing overhead costs
Finished goods inventory the costs associated with the completed but still unsold units
on hand
Inventory Planning and Control
“Inventory is a double-edged sword”
o On one hand, management wants to have a wide variety and sufficient quantities
on hand so that customers have a good selection and always find what they want
in stock
o On the other hand, such policy might result in in excessive costs the more
inventory the more cost to look after them
Companies must monitor inventory levels to carefully minimize carrying costs and meet
customer demands
Information for Decision Making
External users must look to financial statements to seek information because they don’t
have the same access as management does
The existence of various types of inventory that the company owns must be clearly
represented
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 
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  
 
RECOGNITION
Accounting Definition of Inventory
Inventory is defined as assets…
(a) Held for sale in the ordinary course of business
(b) In the process of production for such sale
(c) In the form of materials or supplies to be consumed in the production process or in
the rendering of services
Goods the company has title to, and include in seller’s inventory:
1. Goods in transit
2. Goods out on consignment
3. Goods sold under buyback agreements
4. Goods sold with high rates of return that cannot be estimated
Physical Goods Included in Inventory
When all risks and rewards of ownership and therefore control have passed to the
purchaser, and inventory is recognized
o At this point, legal title has often passed by then as well
Goods in Transit
o F.O.B Shipping point the legal title passes to the buyer when the seller delivers
the goods to the common carrier (transporter) who then acts as an agent for the
buyer
o F.O.B stands for free on board
o F.O.B Destination point legal title passes when the goods reach the destination
o Goods in transit at the end of a fiscal period that were sent F.O.B shipping point
are recorded by the buyer as purchases of the period and should be included in
ending inventory
o If these purchases are not recognized, then they are understated inventories
o Cut-off schedule a schedule prepared by the accountant for the end of the
period to ensure that goods received from suppliers around the end of the year are
recorded in the appropriate period
Includes that following controls:
Curtailing and controlling the receipt and shipment of goods
around the time of the count
Marking freight and shopping documents as “before” or “after” the
inventory count
Ensuring that receiving reports on goods received before the count
are linked to invoices that are also recorded in the same period
Consigned Goods
Consigned goods goods that are sold on consignment yet remain in the
consignor’s property and therefore must be included in inventory
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o Even though possession rests with the consignee, legal title is held by the
consignor
o The consignor has the risks and rewards of ownership
o The inventory out on consignment is shown as a separate item or there are
additional disclosures in the notes
o The consignee should be extremely careful not to include any consigned goods in
its inventory account
Sales with buyback agreements
o Sometimes an enterprise its inventory to obtain financing without reporting either
the liability or the inventory on its balance sheet
This type of transaction usually involves a transfer of the inventory with
either a real or implied buyback agreement
o Sometimes called “parking transactions”
Because the seller simply parks the inventory on another company’s
balance sheet
o If the risks and rewards of ownership and therefore control have not been
transferred, the inventory should remain on the seller’s books
Sales with high rates of return
o There are often informal or formal agreements that allow a buyer to return
inventory for a full or partial refund
o The vendor retains the risks and rewards for those items expected to be returned
o If a reasonable prediction of the returns can be established, then the goods may be
considered sold by the vendor and the expected value of the sale is recorded as
revenues
Sales with delayed payment terms
o With delayed payments, the seller often retains legal title to the merchandise until
all payments have been received
Purchase Commitments
o Purchase commitments arrangements under which a company agrees to buy
inventory weeks, months, or even years in advance
o Title to the merchandise or materials described in these purchase commitments
does not pass to the buyer until delivery
o Ordinary orders, where the prices are determined at the time of shipment and the
buyer or seller can still cancel the order, does not represent either an asset or a
liability to the buyer
o Even with formal, non-controllable purchase contracts, no asset or liability is
recognized on the date when the contract takes effect, because it is an executory
contract
Neither party has performed its part of the contract
Executory contract an agreement requiring future, continuing
performance by both parties
o Onerous contract a contract where the unavoidable costs of completing the
contract are higher than the benefits expected from receiving the contracted goods
or services
Flow of costs
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