Goods in transit are included in a purchaser’s inventory
A. At any time during transit
B. When the purchaser is responsible for paying freight charges.
C. When the supplier is responsible for freight charges.
D. If the goods are shipped FOB destination
E. After the half-way point between the buyer and seller
The correct answer and explanation is:
Correct Answer:
B. When the purchaser is responsible for paying freight charges.
Explanation:
The inclusion of goods in transit in a purchaser’s inventory depends on the terms of the sale, particularly the shipping terms, which dictate when ownership (title) of the goods transfers from the seller to the buyer. This is governed by two main shipping terms: FOB shipping point and FOB destination.
- FOB Shipping Point:
Under this arrangement, ownership of the goods transfers to the purchaser as soon as the goods leave the seller’s premises. If the purchaser is responsible for the freight charges, the goods are included in the purchaser’s inventory during transit. This is because the buyer assumes ownership and risk of loss once the goods are handed over to the carrier. - FOB Destination:
In this case, ownership of the goods does not transfer to the purchaser until the goods arrive at the purchaser’s location. The seller retains responsibility for the goods during transit. If the goods are shipped under FOB destination terms, they are not included in the purchaser’s inventory until they reach the purchaser. - Relevance of Freight Charges:
The responsibility for paying freight charges often aligns with the shipping terms. When the purchaser pays for the freight (as in FOB shipping point), they bear the risk and own the goods in transit, so they should record them in their inventory. Conversely, if the seller pays the freight (as in FOB destination), the goods remain in the seller’s inventory during transit. - Why Option B Is Correct:
Goods in transit should be included in the purchaser’s inventory only if the purchaser is responsible for freight charges, as this indicates ownership has transferred to the purchaser at the shipping point.
Thus, the correct answer reflects the alignment of inventory accounting with the purchaser’s responsibility for freight.