alonzo spellman, an inventory control specialist, is interested in better unders

Question

alonzo spellman, an inventory control specialist, is interested in better understanding the accounting for inventories. although alonzo understands the more sophisticated computers control systems, he has little knowledge of how inventory cost is determined. In studying the records of ditka enterprises, which sells normal brand-name goods from its own store and on consignment through wannestedt, inc., he asks you to answer the following questions.

Instructions:

(a) Should Ditka Enterprises inclde in its inventory normal brand-name goods purchases from its suppliers but not yet received if the terms of purchase are f.o.b. shipping point (manufacturer's plant)? Why?

(b) Should Ditka Enterpirses include freight-in expenditures as an inventory cost? Why?

(c) What are products on consignment? How are the products that are on consignment reported on the financial statements?

Explanation / Answer

(a) If the purchase terms were FOB shipping point being at manufacturer's plant. Dikta enterprises must include in its inventory goods purchased from its supplier at the time of goods shipping. For the purpose of accounting the title is presumed to be passed at the time of shipping.

(b) Yes the freight paid-in must be included as an inventorible cost, this is because as the value of freight paid would be included in price payment or consideration given to aquire an asset.

(c) Product on consignment refers to the inventories owned by Dikta enterprises and that which are physically transferred to another enterprises. However the title of goods rest with the Dikta enterprises till the sale of goods by another enterprise.

In diktha balance sheet the inventory on consignment is reported in inventory section. Mostl oftenly the inventory is reclassified from regular and consigned inventory. However in another enterprise balancesheet it will not be reported either in liability section or in inventory section.

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