For each of the following, calculate the cost of inventory reported on the balance sheet.
a. The total merchandise on hand at the end of the year as determined by taking a physical inventory is $62,000. Of the $62,000, $8,000 has been sold FOB destination and is awaiting pickup by the carrier.
b. The total merchandise inventory counted at the end of the year was $63,000. Purchases for $6,000 are in transit under FOB shipping point terms.
c. The total merchandise inventory counted at the end of the year was $75,000. Purchases for $5,000 are in transit under FOB destination terms.
The Correct Answer and Explanation is:
Answers:
a. Inventory reported on the balance sheet = $62,000
b. Inventory reported on the balance sheet = $69,000
c. Inventory reported on the balance sheet = $75,000
Explanation
The cost of inventory reported on the balance sheet represents the value of all goods owned by a company at the end of the accounting period, regardless of physical location, as long as ownership has legally transferred. To determine what should be included, the shipping terms—FOB shipping point and FOB destination—play a crucial role.
Part a:
The total physical count is $62,000, which includes $8,000 of goods sold but not yet picked up by the carrier. Since the goods were sold FOB destination, the ownership has not yet passed to the buyer. Under FOB destination, the seller retains ownership until the goods are delivered to the buyer. Therefore, even though they are sold, they are still the seller’s inventory.
✅ Include the full $62,000.
Part b:
The physical count is $63,000, and there are purchases of $6,000 in transit under FOB shipping point terms. With FOB shipping point, ownership transfers to the buyer as soon as the goods leave the seller’s dock. This means that even though the $6,000 in inventory hasn’t arrived physically, it legally belongs to the buyer and should be included.
✅ Include the $6,000 in-transit purchase: $63,000 + $6,000 = $69,000.
Part c:
The physical count is $75,000, with $5,000 in transit under FOB destination terms. Under these terms, the seller retains ownership during transit, and the buyer only takes ownership upon delivery. Since the $5,000 worth of goods hasn’t been delivered yet, it does not belong to the buyer at year-end and should not be included in inventory.
✅ Inventory remains at $75,000.
Understanding shipping terms is essential in determining whether inventory in transit should be included on the balance sheet, which directly affects financial accuracy.
