Freight costs paid by a seller on merchandise sold to customers will cause an increase

 Freight costs paid by a seller on merchandise sold to customers will cause an increase

a.in the selling expense of the buyer.

b.in operating expenses for the seller.

c.to the cost of goods sold of the seller.

d.to a contra-revenue account of the seller.

The correct answer and explanation is :

Correct Answer:

b. In operating expenses for the seller.

Explanation:

When a seller pays for freight costs on merchandise sold to customers, it is considered a selling expense rather than part of the cost of goods sold (COGS) or a contra-revenue account. These freight costs, often referred to as “Freight-Out” or “Delivery Expense,” are classified under operating expenses on the income statement.

Understanding Freight Costs and Their Impact:

1. Freight-In vs. Freight-Out:

• Freight-In: When a company purchases inventory and pays for the shipping costs, these expenses are added to the cost of goods purchased and later included in cost of goods sold (COGS) when the inventory is sold.
• Freight-Out: When a company sells inventory and covers the shipping costs, these costs are recorded as selling expenses under operating expenses.

1. Why Freight-Out is an Operating Expense:

• Freight-Out is a cost incurred to deliver products to customers, which is part of the company’s operational activities but not directly tied to the production of goods.
• It does not impact revenue directly, nor is it deducted from sales revenue as a contra-revenue account (such as sales discounts or sales returns).
• Instead, it falls under selling expenses, a category of operating expenses, because it is an expense related to making the sale happen.

1. Impact on Financial Statements:

• Freight-Out increases selling expenses, which are subtracted from gross profit to determine operating profit.
• Higher freight expenses reduce net income, affecting profitability.

Conclusion:

Since the seller is responsible for paying the freight charges, the cost is considered an operating expense under selling expenses. Therefore, the correct answer is option (b) – an increase in operating expenses for the seller.