Goods in transit are included in a purchaser’s inventory:
A At any time during transit.
B When the goods are shipped FOB shipping point.
C When the supplier is responsible for freight charges.
D If the goods are shipped FOB destination.
E After the half-way point between the buyer and seller.
The correct answer and explanation is :
The correct answer is B: When the goods are shipped FOB shipping point.
Explanation:
In accounting, the inclusion of goods in transit as part of a purchaser’s inventory depends on the terms of the shipping arrangement, which are outlined as part of the sales contract. The key terms here are FOB shipping point and FOB destination.
- FOB Shipping Point: The term “FOB” stands for “Free On Board” and refers to the point at which ownership of the goods is transferred from the seller to the buyer. When goods are shipped FOB shipping point, the responsibility for the goods and the risk of loss passes to the buyer as soon as the goods are shipped from the seller’s location, even if the goods are still in transit. Therefore, under this arrangement, the purchaser includes the goods in their inventory as soon as they leave the seller’s warehouse, regardless of whether they have physically received them.
- FOB Destination: On the other hand, when goods are shipped FOB destination, ownership and responsibility for the goods remain with the seller until the goods arrive at the buyer’s location. The buyer cannot include these goods in their inventory until they physically receive them, as the seller retains ownership during transit.
- Why the Other Options Are Incorrect:
- A: At any time during transit: Goods are not automatically included in the buyer’s inventory simply because they are in transit. The specific shipping terms must dictate when ownership passes to the buyer.
- C: When the supplier is responsible for freight charges: The supplier’s responsibility for freight charges does not determine when goods should be included in the buyer’s inventory. It’s the point of ownership transfer that matters.
- D: If the goods are shipped FOB destination: As explained, the goods are only included in the buyer’s inventory when they arrive at the destination.
- E: After the half-way point between the buyer and seller: This is not a standard method for determining when goods are included in inventory. The transfer of ownership, not the physical location of the goods, is what matters.
Therefore, under FOB shipping point, goods are included in the purchaser’s inventory as soon as they leave the seller’s premises.