Streuling Inc.is preparing its 2015 year-end financial statements. Prior to any
ID: 2452117 • Letter: S
Question
Streuling Inc.is preparing its 2015 year-end financial statements. Prior to any adjustments, inventory is valued at $76,050. The following information has been found relating to certain inventory transactions:
(a) Goods valued at $11,000 are on consignment with a customer. These goods are not included in the $76,050 inventory figure.
(b) Goods costing $2,700 were received from a vendor on Januarty 5, 2016. The related invoice was recieved and recorded on January 12,2016. The goods were shipped on December 31, 2015, terms FPB shipping point
(c) Goods costing $8.500 were shipped December 31,2015 and were delivered to the customer on January 2,2016. the terms of the invoice were FOB shipping pint. the goods were included in ending inventory for 2015 even though the sale was recorded in 2015
(d) A $3,500 shipment of goods to a customer on 12/31, terms FOB destination, was not included in the year-end inventory. The goods cost $2600 and were delivered to the customer on 1/8/16. The sale was properly recorded in 2016
(e) An invoice for goods costing $3500 was recieved and recorded as a purchase on 12/31/15. The related goods, shipped FOB destination, were received on 1/2/16, and thus were not included in the physical inventory
(f) Goods valued at $6500 are on consignment from a vendor. These goods are not included in the year-end inventory figure.
(g) A $10500 shipment of goods to a customer on 12/30/15, terms FOB destination, was recorded as a sale in 2016. The goods, costing $8200 and delivered to the customer on 1/6/16, were not included in 2015 ending inventory.
Instructions:
1. Determine the appropriate accounting treatment for each of the preceding terms. Justify your answers.
2. Compute the proper inventory amount to be reported on Streuling Inc.'s balance sheet for the year-ended December 31, 2015.
3. By how much would net income have been misstated if no adjustments were made for the given transactions? Ignore income taxes
Explanation / Answer
1. ( a ) Goods on consignment are part of the consignor's inventory, and should be excluded from the consignee's inventory. This is because, even though the consignee has physical possession of the goods, the consignor owns the goods. In this case, therefore Streuling Inc, being the consignor should include the cost of the goods of $ 11,000 in its ending inventory.
(b) FOB shipping point means free on board at shipping point, and the buyer incurs all transpotation cost after the merchandise have been loaded on any carrier. It implies terms of sale under which, the title of goods passes to the buyer at the point of shipment. Therefore, the title and ownership transfer to the buyer as soon as the goods are delivered to a goods carrier. Logically therefore, despatch from the seller's premises should be the trigger for the vendor to recognise the revenue and the cost of goods sold, and for the buyer to include the goods in transit at the year end in its ending inventory.
In this case therefore, the title in the goods has already passed on 31st of December, 2015 and Streuling Inc should include the goods in transit in its ending inventory for the year 2015.
( c ) As the terms of sale are FOB shipping point, and the goods were shipped on 31st December, sale of the goods has effectively taken place on that date. Therefore Streuling Inc should recognise the sale and the related revenue in 2015, and not 2016.The cost of the goods should not be included in the ending inventory.
(d) FOB destination means free on board to destination, i.e the seller ships the goods to their destination without charge to the buyer. Also if the terms are FOB destination, the seller should include goods in transit at the year end in its ending inventory. Accordingly, Streuling Inc should include the cost of $ 2600 as goods in transit in its ending inventory.
( e ) By the same reasoning as in (d), the goods in transit should be recorded in the closing inventory of the seller. Therefore, Streuling Inc. need not include the cost of the goods in its ending inventory.
( f ) In this case, Streuling Inc. is the consignee. Therefore the goods should not be part of its ending inventory.
( g )Since it is FOB destination sale, the title will pass to the buyer only when the goods arrive at their destination. Till such point, title is with seller, and the goods should be part of the ending inventory of Streuling Inc.
2. Ending inventory amount to be recorded and reported:
Inventory Value as on 31 December 2015 prior to adjustments $76,050
Adjustment for transaction (a) +11,000
Adjustment for transaction ( b) + 2,700
Adjustment for transaction ( c ) (8,500)
Adjustment for transaction ( d ) +2,600
Adjustment for transaction ( e ) NIL
Adjustment for transaction ( f ) NIL
Adjustment for transaction ( g ) +8,200
Correct value for 2015 ending inventory of Streuling Inc should be $ 92,050
3. If the adjustments were not made, cosing inventory would have been understated by $ 16,000, which would have had the effect of understating net profit by the same amount. As a result, earning per share of the company would have been lower, thereby negatively impacting shareholder value.