[markfwb]

Under a perpetual inventory system, If merchandise is received then freight charges are debited to inventory. Why is this? Wouldnt that make inventory overstated after a physical count was done. For instance if freight charges and insurance were $200 dollars wouldnt the physical count of inventory be off $200 dollars if you debit inventory like my textbook says?

Using only Gleim. If i can pass this exam then anyone can. I am a stupid idiot.

[JohnWayneIsGod]

You are confusing FOB Shipping Point (Freight-in) with FOB Destination (Freight out). ‘Shipping point' is paid by the buyer and is a cost of receiving inventory, thus increases inventory, ‘Destination' is a cost incurred by the seller and is considered a selling expense.

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-John Wayne

[Missy]

FOB determines where the title changes hands. Shipping point means the sale is booked when it leaves the seller, destination means the sale doesn't occur until it arrives at the buyer (important concept for year end cutoffs) but that's not your question.

If you buy a widget for $10 and the freight is $1 your carrying value in inventory is $11. If you resell the widget your cost of goods sold is $11 so nothing is overstated.

The sellers price and the buyers cost don't have to be the same as long as the difference is a legitimate cost of bringing in the inventory.

Licensed Massachusetts Non Reporting CPA since 2012
Finance/Admin/HR Manager

[FIFOisbetterthanLIFO]

All inventory costs are capitalized until the inventory is sold. In real life, when inventory is received you take the total cost of the invoice (shipping + handling) and divide it by the number of units purchased. You would also capitalize and allocate any warehousing or storage costs.

JE for receiving inventory is:

Debit: Inventory

Credit: Cash/AP

JE for selling inventory is:

Debit: Cash/A/R

Credit: Sales

Debit: COGS

Credit: Inventory

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[markfwb]

Opps i ment FOB destination…. thanks. So each item purchased would have freight charges included in its cost?

Using only Gleim. If i can pass this exam then anyone can. I am a stupid idiot.

[markfwb]

No wait… i ment fob shipping point. Fob shipping point the buyer pays freight cost and fob destination seller pay shipping. I was asking how fob shipping point freight costs would effect a physical inventory count but FifoisbetterthanLifo answered my question 🙂 thank you so much.

Using only Gleim. If i can pass this exam then anyone can. I am a stupid idiot.

[Author]

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