[Anonymous]

Please help. I am so weak on this subject. I didn’t do well on my first attempt with FAR because I was & am still in doubt about shipping point & destination. Now I am encountering with most of my sims practice with AUD and I see a lot of inventory/sale/AR transactions involving these terms.

Can someone please explain to me in simple details what to remember about this subject?

All I know is with FOB-Shipping, “Buyer” pays while FOB-Destination, “Seller” pays. I am confused with when to base (the date) of ownership/passing of title.

Thanks.

[Anonymous]

What they're looking for is cutoff dates. If you know who owns the inventory as of say 12/31/0X, then you will know whether inventory is overstated or understated at year-end. And then in turn, what the appropriate journal entry is to correct the overstatement/understatement.

This concept also applies to inventory on consignment. For example: If a company has unsold inventory on consignment. The inventory should be counted as theirs as year-end. So if the question says they did not include unsold consignments in inventory, then they have understated inventory.

[acamp]

Has to do when title transfers:

FOB-Shipping Point – Title transfers to buyer when UPS picks up the box from the seller

FOB-Destinatio – Title transfers to the buyer when UPS drops off the box at the seller

Ninja + Wiley Test Bank: [FAR - 81] [REG - 76] [BEC - 88] [AUD - 73](doh!)

Becker Videos: [AUD - 82]

California CPA

[mangos]

Easy way to remember is to add “title passes” before the term.

ie: Title passes at shipping point. Title passes at destination.

FAR (5/07/13): 96

[Anonymous]

Thanks, Bluegirl.

Let's say I am the buyer, goods which are shipped to me under FOB Shipping Point terms before year-end but I have not received them until after year-end. Who owns those goods at year-end? Buyer or seller?

[Anonymous]

@amordiva (Correct me if I'm wrong ninjas) The buyer owns them at year end. The title transfers when they are shipped. So if the buyer did not include them in inventory until they received them (sometime in January), then their inventory is understated at year-end. For audit purposes, this illustrates the reasons for cutoff testing.

[J]

@bluegirl… that's correct.

FOB Shipping: Buyer pays shipping and liability/ownership transfers when goods are passed to common carrier. If the buyer purchases something on December 28, 2012 and it is shipped the same day, it goes on the buyer's books that day and shows up on the buyer's balance sheet as inventory for FY 2012, even if it is not received until January 2013.

FOB Destination: Seller pays shipping and liability/ownership transfers when goods are delivered to seller. If the buyer purchases something on December 28, 2012 and it is shipped the same day, it is still on the seller's books. If the merchandise is not received before the end of FY 2012, the buyer should NOT included it in inventory and would recognize inventory and the associated liability (A/P) only when the merchandise is received.

[STAT]

So in Bluegirl's example, where inventory is understated at year end, what would be the JE to correct this? Dr inv, Cr cogs?

[mla1169]

No, I wouldn't cr cogs (you do that when you recognize revenue). I'd DR inventory and CR (depending on the chart of accounts) an accounts payable accrual, an inventory in transit account, or outstanding receipts.

FAR- 77
AUD -49, 71, 84
REG -56,75!
BEC -75

Massachusetts CPA (non reporting) since 3/12.

[Anonymous]

Thanks Guys for taking time to reply. I am now convinced with FOB Shipping Point, without any shadow of doubt even if the goods have not arrived yet, buyer owns them.

@InterFC, I am still doubting FOB-Destination with regards to when the title/ownership passes to the buyer. You wrote above “when the goods are delivered are to the seller…” I guess that's a typo error. Anyway, goods belong to the seller until they reach the buyer? Is that correct?

P.S. @Stat, I think it should be [DR] Invy [CR] AP.

[Anonymous]

yes, I agree @mla1169 (check me on this ninjas)

Dr Inventory (increase inventory)

Cr A/P (increase payables)

You only touch COGS when you sell something and need to decrease inventory:

Dr COGs

Cr Inventory

And then to record the sale for above items removed from inventory:

Dr A/R

Cr Revenue/Sales

[Anonymous]

Your confusion may be from the point of view of whether you are buyer/seller. Questions may ask from either point of view, so be prepared to know it from both angles.

FOB Shipping point – title transfers to buyer (from seller) when items are SHIPPED. So, when they are in transit, they belong to buyer.

FOB Destination point – title transfers to buyer (from seller) when items reach their DESTINATION. So when they are in transit they belong to seller.

[Anonymous]

Again, thanks Guys for all the input.

@Bluegirl, you're right. It gets even more confusing when the situation involves ratio analysis and all that. At least today, with the help of everyone here, I am convinced now who owns what and when. LOL.

I dug my book (Intermediate Acctg) about valuation of inventory just now to make sure I really understand the concept of these terms.

Guidelines for Determining Ownership

GENERAL RULE:

Inventory is buyer’s when received, except:

FOB Shipping Pt > Buyer’s at the time of delivery to common carrier

Consignment goods > Seller’s, not buyer’s

Sales with buybacks > Seller’s , not buyer’s

Sales with high rates or returns > Buyer’s, if you can estimate returns

Sales on installments > Buyer’s, if you can estimate collectibility

[J]

@amordiva… yes, sorry. I was typing quickly and didn't realize that mistake and cannot go back and edit the post at this point. FOB Destination – ownership/liability transfers when goods are delivered to the buyer.

[Author]

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