Which of the following should not be included in the physical inventory of a company?
(a) Goods held on consignment from another company.
(b) Goods shipped on consignment to another company.
(c) Goods in transit from another company shipped FOB shipping point.
(d) None of the above.
The Correct Answer and Explanation is :
The correct answer is (a) Goods held on consignment from another company.
Explanation:
In physical inventory, companies are required to count and report only the goods that they own. Inventory refers to the stock of goods a company holds that it intends to sell in the normal course of business or use in its manufacturing processes. The key to determining which goods should be included in a company’s physical inventory lies in ownership.
(a) Goods held on consignment from another company: These goods should not be included in the physical inventory of the company holding them. In a consignment arrangement, one company (the consignor) sends goods to another company (the consignee) to sell, but the consignor retains ownership of the goods until they are sold. As the consignee does not own the goods, they should not be included in their inventory count.
(b) Goods shipped on consignment to another company: These goods should be included in the physical inventory of the consignor, not the consignee. While the goods are at the consignee’s location, the ownership remains with the consignor, and thus, they are still part of the consignor’s inventory until sold.
(c) Goods in transit from another company shipped FOB shipping point: When goods are shipped FOB (Free on Board) shipping point, the title (ownership) of the goods transfers from the seller to the buyer as soon as the goods are shipped, even though they may still be in transit. Therefore, the goods should be included in the buyer’s physical inventory, as they now belong to the buyer, not the seller.
In summary, the key factor in determining whether goods should be included in a company’s inventory is ownership. Goods held on consignment do not belong to the company holding them and should not be included in their inventory count.