How is the significant amount of consignment inventory reported in the statement of financial position?

How to Account for a Consignment

Consignment occurs when goods are sent by their owner (the consignor) to an agent (the consignee), who undertakes to sell the goods. The consignor continues to own the goods until they are sold, so the goods appear as inventory in the accounting records of the consignor, not the consignee.

Consignment Accounting - Initial Transfer of Goods

When the consignor sends goods to the consignee, there is no need to create an accounting entry related to the physical movement of goods. It is usually sufficient to record the change in location within the inventory record keeping system of the consignor. In addition, the consignor should consider the following maintenance activities:

• Periodically send a statement to the consignee, stating the inventory that should be on the consignee's premises. The consignee can use this statement to conduct a periodic reconciliation of the actual amount on hand to the consignor's records.

• Request from the consignee a statement of on-hand inventory at the end of each accounting period when the consignor is conducting a physical inventory count. The consignor incorporates this information into its inventory records to arrive at a fully valued ending inventory balance.

• It may also be useful to occasionally conduct an audit of the inventory reported by the consignee.

From the consignee's perspective, there is no need to record the consigned inventory, since it is owned by the consignor. It may be useful to keep a separate record of all consigned inventory, for reconciliation and insurance purposes.

Consignment Accounting - Sale of Goods by Consignee

When the consignee eventually sells the consigned goods, it pays the consignor a prearranged sale amount. The consignor records this prearranged amount with a debit to cash and a credit to sales. It also purges the related amount of inventory from its records with a debit to cost of goods sold and a credit to inventory. A profit or loss on the sale transaction will arise from these two entries.

Depending upon the arrangement with the consignee, the consignor may pay a commission to the consignee for making the sale. If so, this is a debit to commission expense and a credit to accounts payable.

From the consignee's perspective, a sale transaction triggers a payment to the consignor for the consigned goods that were sold. There will also be a sale transaction to record the sale of goods to the third party, which is a debit to cash or accounts receivable and a credit to sales.

CHAPTER 8

VALUATION OF INVENTORIES:

A COST-BASIS APPROACH

CHAPTER LEARNING OBJECTIVES

1. Describe inventory classifications and different inventory systems.

2. Identify the goods and costs included in inventory.

3. Compare the cost flow assumptions used to account for inventories.

4. Determine the effects of inventory errors on the financial statements.

*5. Describe the LIFO cost flow assumption.

Test Bank for Intermediate Accounting: IFRS Edition, 3e

TRUE FALSE—Conceptual

1. A manufacturing concern would report the cost of units only partially processed as inventory in the statement of financial position.

2. Both merchandising and manufacturing companies normally have multiple inventory accounts.

3. IFRS requires manufacturers to disclose their inventory components on the statement of financial position or in related notes.

4. Goods in transit, shipped FOB shipping point, are included in the buyer’s statement of financial position at the time of delivery to the common carrier.

5. Tang, Inc. sells collectible jewelry on consignment from various manufacturers and should include this consigned inventory on its statement of financial position.

6. Companies must allocate the cost of all the goods available for sale (or use) between the income statement and the statement of financial position.

7. When using a perpetual inventory system, freight charges on goods purchased are debited to Freight-In.

8. If a supplier ships goods f.o. destination, title passes to the buyer when the supplier delivers the goods to the common carrier.

9. If both purchases and ending inventory are overstated by the same amount, net income is not affected.

10. Freight charges on goods purchased are considered a period cost and therefore are not part of the cost of the inventory.

11. Purchase Discounts Lost is a financial expense and is reported in the “other income and expense” section of the income statement.

12. Interest costs incurred to manufacture large quantities of inventory that are produced routinely should be capitalized.

13. A trade discount that is granted as an incentive for a first-time customer or as a reward for large order should be accounted for by the purchaser as revenue.

14. Freight costs incurred by the seller to ship merchandise to the purchaser are accounted for by the seller as part of inventory on the statement of financial position.

15. Abnormal freight costs are not included on the statement of financial position as part of the cost of inventory.

16. Under IFRS, agricultural inventories, such as wheat, oranges, etc., are recorded at their fair value less estimated selling costs at the point of harvest.

8 - 4 Test Bank for Intermediate Accounting: IFRS Edition, 3e

Valuation of Inventories: A Cost-Basis Approach

1. Culver Company purchases the majority of its inventory from three primary suppliers for re-sale to customers around the world. Culver Company’s statement of financial position will include a. Finished goods inventory. b. Work-in-process inventory. c. Merchandise inventory. d. All of the choices are correct.

2. Companies must allocate the cost of all the goods available for sale (or use) between a. The cost goods on hands at the beginning of the period as reported on the statement of financial position and the cost of goods acquired or produced during the period. b. The cost of goods on hand at the end of the period as reported on the statement of financial position and the cost of goods acquired or produced during the period. c. The income statement and the statement of financial position. d. All of the choices are correct.

3. Mineral Makers (MM) Company keeps its inventory records using a perpetual system. At December 31, 2019, the unadjusted balance in the inventory account is €64,000. Through a physical count on December 31, 2019, MM determines that its actual merchandise inventory at year-end is €62,500. Which of the following is true regarding the statement of financial position and the income statement of MM at December 31, 2019? a. Inventory is increased and cost of goods sold is decreased by €1,500. b. Inventory is decreased and cost of goods sold is increased by €1,500. c. Inventory is increased and cost of goods sold is increased by €1,500. d. Inventory is decreased and cost of goods sold is decreased by €1,500.

4. Tang, Inc. sells collectible jewelry on consignment from various manufacturers. Additionally, Tang sells its own line of specialty jewelry manufactured in-house. On December 31, 2019, during Tang, Inc 's annual inventory count, an inexperienced new staff member included in Tang’s ending inventory €350,000 worth of inventory held on consignment from Metcalf Associates. Which of the following is correct regarding the impact of this error on Tang’s income statement and statement of financial position at December 31, 2019? a. Ending inventory is understated by €350,000. b. Retained earnings is overstated by €350,000. c. Cost of goods sold is overstated by €350,000. d. The financial statements are correctly stated.

5. Why are inventories included in the computation of net income? a. To determine cost of goods sold. b. To determine sales revenue. c. To determine merchandise returns. d. Inventories are not included in the computation of net income.

6. Which of the following is a characteristic of a perpetual inventory system? a. Inventory purchases are debited to a Purchases account. b. Inventory records are not kept for every item. c. Cost of goods sold is recorded with each sale. d. Cost of goods sold is determined as the amount of purchases less the change in inventory.

Valuation of Inventories: A Cost-Basis Approach

1. Which of the following items should be included in a company's inventory at the statement of financial position date? a. Goods in transit which were purchased f.o. destination. b. Goods received from another company for sale on consignment. c. Goods sold to a customer which are being held for the customer to call for at his or her convenience. d. None of these are correct.

Use the following information for questions 40 and 41.

During 2018 Carne Corporation transferred inventory to Nolan Corporation and agreed to repurchase the merchandise early in 2019. Nolan then used the inventory as collateral to borrow from Norwalk Bank, remitting the proceeds to Carne. In 2019 when Carne repurchased the inventory, Nolan used the proceeds to repay its bank loan.

1. This transaction is known as a(n) a. consignment. b. installment sale. c. assignment for the benefit of creditors. d. product financing arrangement.

2. On whose books should the cost of the inventory appear at the December 31, 2015 statement of financial position date? a. Carne Corporation b. Nolan Corporation c. Norwalk Bank d. Nolan Corporation, with Carne making appropriate note disclosure of the transaction

S42. Valuation of inventories requires the determination of all of the following except a. the costs to be included in inventory. b. the physical goods to be included in inventory. c. the cost of goods held on consignment from other companies. d. the cost flow assumption to be adopted.

P43. The accountant for the Pryor Sales Company is preparing the income statement for 2019 and the statement of financial position at December 31, 2019. Pryor uses the periodic inventory system. The January 1, 2019 merchandise inventory balance will appear a. only as an asset on the statement of financial position. b. only in the cost of goods sold section of the income statement. c. as a deduction in the cost of goods sold section of the income statement and as a current asset on the statement of financial position. d. as an addition in the cost of goods sold section of the income statement and as a current asset on the statement of financial position.

P44. If the beginning inventory for 2018 is overstated, the effects of this error on cost of goods sold for 2018, net income for 2018, and assets at December 31, 2019, respectively, are a. overstatement, understatement, overstatement. b. overstatement, understatement, no effect. c. understatement, overstatement, overstatement. d. understatement, overstatement, no effect.

Test Bank for Intermediate Accounting: IFRS Edition, 3e

S45. The failure to record a purchase of merchandise on account even though the goods are properly included in the physical inventory results in a. an overstatement of assets and net income. b. an understatement of assets and net income. c. an understatement of cost of goods sold and liabilities and an overstatement of assets. d. an understatement of liabilities and an overstatement of equity.

1. Dolan Co. received merchandise on consignment. As of March 31, Dolan had recorded the transaction as a purchase and included the goods in inventory. The effect of this on its financial statements for March 31 would be a. no effect. b. net income was correct and current assets and current liabilities were overstated. c. net income, current assets, and current liabilities were overstated. d. net income and current liabilities were overstated.

2. Green Co. received merchandise on consignment. As of January 31, Green included the goods in inventory, but did not record the transaction. The effect of this on its financial statements for January 31 would be a. net income, current assets, and retained earnings were overstated. b. net income was correct and current assets were understated. c. net income and current assets were overstated and current liabilities were understated. d. net income, current assets, and retained earnings were understated.

3. Feine Co. accepted delivery of merchandise which it purchased on account. As of December 31, Feine had recorded the transaction, but did not include the merchandise in its inventory. The effect of this on its financial statements for December 31 would be a. net income, current assets, and retained earnings were understated. b. net income was correct and current assets were understated. c. net income was understated and current liabilities were overstated. d. net income was overstated and current assets were understated.

4. On June 15, 2019, Wynne Corporation accepted delivery of merchandise which it purchased on account. As of June 30, Wynne had not recorded the transaction or included the merchandise in its inventory. The effect of this on its statement of financial position for June 30, 2019 would be a. assets and equity were overstated but liabilities were not affected. b. equity was the only item affected by the omission. c. assets, liabilities, and equity were understated. d. None of these answers are correct.

5. What is the effect of a €50,000 overstatement of last year's inventory on current year’s ending retained earning balance? a. Understated by €50,000. b. No effect. c. Overstated by €50,000. d. Need more information to determine.

Test Bank for Intermediate Accounting: IFRS Edition, 3e

1. Computers For You is a retailer specializing in selling computers and related equipment. During 2019, Computers For You sells €200,000 of merchandise to Sandcastles, Inc. Computers For You incurs €24,000 of freight costs associated with these sales. Which of the following is true regarding how this €24,000 is treated on the financial statements? a. Computers For You will report the €24,000 as part of merchandise inventory on the statement of financial position. b. Sandcastles, Inc. will report the €24,000 as part of merchandise inventory on the statement of financial position. c. Computers For You will report the €24,000 as part of operating expenses on the income statement. d. Sandcastles, Inc. will report the €24,000 as an accounts receivable on the statement of financial position.

2. Which of the following is a product cost as it relates to inventory? a. Selling costs. b. Interest costs. c. Raw materials. d. Abnormal spoilage.

3. Which of the following is a period cost? a. Labor costs. b. Freight in. c. Production costs. d. Selling costs.

4. Which method may be used to record cash discounts a company receives for paying suppliers promptly? a. Net method. b. Gross method. c. Average method. d. Both the net method and the gross method.

5. Which of the following is included in inventory costs? a. Product costs. b. Period costs. c. Product and period costs. d. Neither product or period costs.

6. Which of the following is correct? a. Selling costs are product costs. b. Manufacturing overhead costs are product costs. c. Interest costs for routine inventories are product costs. d. All of these are correct.

S62. Costs which are inventoriable include all of the following except a. costs that are directly connected with the bringing of goods to the place of business of the buyer. b. costs that are directly connected with the converting of goods to a salable condition. c. buying costs of a purchasing department. d. selling costs of a sales department.

Valuation of Inventories: A Cost-Basis Approach

1. Which of the following types of interest cost incurred in connection with the purchase or manufacture of inventory should be capitalized as a product cost? a. Purchase discounts lost b. Interest incurred during the production of discrete projects such as ships or real estate projects c. Interest incurred on notes payable to vendors for routine purchases made on a repetitive basis d. All of these should be capitalized.

2. The use of a Discounts Lost account implies that the recorded cost of a purchased inventory item is its a. invoice price. b. invoice price plus the purchase discount lost. c. invoice price less the purchase discount taken. d. invoice price less the purchase discount allowable whether taken or not.

3. The use of a Purchase Discounts account implies that the recorded cost of a purchased inventory item is its a. invoice price. b. invoice price plus any purchase discount lost. c. invoice price less the purchase discount taken. d. invoice price less the purchase discount allowable whether taken or not.

Use the following information for questions 66 and 67.

During 2019, which was the first year of operations, Oswald Company had merchandise purchases of $985,000 before cash discounts. All purchases were made on terms of 2/10, n/30. Three-fourths of the items purchased were paid for within 10 days of purchase. All of the goods available had been sold at year end.

1. Which of the following recording procedures would result in the highest cost of goods sold for 2019?

   1. Recording purchases at gross amounts
   2. Recording purchases at net amounts, with the amount of discounts not taken shown under "other income and expense" in the income statement a. 1 b. 2 c. Either 1 or 2 will result in the same cost of goods sold. d. Cannot be determined from the information provided.

2. Which of the following recording procedures would result in the highest net income for 2019?

   1. Recording purchases at gross amounts
   2. Recording purchases at net amounts, with the amount of discounts not taken shown under "other income and expense" in the income statement a. 1 b. 2 c. Either 1 or 2 will result in the same net income. d. Cannot be determined from the information provided.

Valuation of Inventories: A Cost-Basis Approach

1. In a period of rising prices, the inventory method which tends to give the highest reported inventory is a. FIFO. b. moving average. c. specific identification. d. weighted-average.

2. Tanner Corporation's inventory cost on its statement of financial position was lower using first-in, first-out than it would have been using average cost. Assuming no beginning inventory, in what direction did the cost of purchases move during the period? a. Up b. Down c. Steady d. Cannot be determined

3. In a period of declining prices, the inventory method which tends to give the highest reported cost of goods sold is a. specific identification. b. average cost. c. FIFO. d. None of these are correct.

4. The acquisition cost of a certain raw material changes frequently. The book value of the inventory of this material at year end will be the same if perpetual records are kept as it would be under a periodic inventory method only if the book value is computed under the a. weighted-average method. b. moving average method. c. FIFO method. d. None of these are correct.

5. Which of the following is a reason why the specific identification method may be considered ideal for assigning costs to inventory and cost of goods sold? a. The potential for manipulation of net income is reduced. b. There is no arbitrary allocation of costs. c. The cost flow matches the physical flow. d. Able to use on all types of inventory.

6. In a period of falling prices which inventory method generally provides the lowest reported inventory? a. Average cost. b. FIFO. c. Moving average. d. Specific identification.

7. In a period of falling prices, which inventory method generally provides the lowest amount of net income? a. Average cost. b. Moving average. c. FIFO. d. Specific identification.

Test Bank for Intermediate Accounting: IFRS Edition, 3e

1. The International Accounting Standards Board requires the specific identification method in certain circumstances. Which of the following is likely to be a circumstance where the specific identification criteria can be met? a. Unit price is low. b. Inventory turnover is low. c. Inventory quantities are large. d. All of the choices are circumstances where the criteria are likely to be met.

2. Homes 4 You builds single-family homes throughout the United States and Europe. The International Accounting Standards Board (IASB) Requires Homes 4 You to use which of the following cost flow assumptions for its inventory? a. FIFO (first-in, first-out). b. Specific identification. c. Weighted-average. d. The IASB allows any of these cost flow assumptions as long as the company uses it consistently.

*84. Oats and Honey Company produces healthy snacks for sale throughout the United States and Europe. The International Accounting Standards Board (IASB) prohibits Oats and Honey from using which of the following cost flow assumptions for its inventory? a. LIFO (last-in, first-out). b. Specific identification. c. Weighted-average. d. The IASB allows any of these cost flow assumptions as long as the company uses it consistently.

Multiple Choice Answers—Conceptual

Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans. Item Ans 21. c 31. a 41. a 51. b 61. b 71. a 81. c 22. b 32. d 42. c 52. a 62. d 72. b 82. b 23. b 33. b 43. b 53. b 63. b 73. a 83. b 24. b 34. b 44. b 54. c 64. d 74. b *84. a 25. c 35. c 45. d 55. c 65. a 75. a 26. c 36. d 46. b 56. c 66. a 76. b 27. b 37. b 47. a 57. c 67. c 77. c 28. b 38. a 48. a 58. d 68. a 78. c 29. a 39. d 49. d 59. d 69. b 79. c 30. c 40. d 50. b 60. a 70. b 80. b

Solutions to those Multiple Choice questions for which the answer is “none of these answers is correct.”

1. Goods in transit which were purchased f.o. shipping point.
2. Assets and liabilities were understated but equity was not affected.

Test Bank for Intermediate Accounting: IFRS Edition, 3e

89. Bell Inc. took a physical inventory at the end of the year and determined that €650,000 of

goods were on hand. In addition, Bell, Inc. determined that €50,000 of goods that were in

transit that were shipped f.o. shipping were actually received two days after the

inventory count and that the company had €75,000 of goods out on consignment. What

amount should Bell report as inventory at the end of the year?

a. €650,000.

b. €700,000.

c. €725,000.

d. €775,000.

90. Bell Inc. took a physical inventory at the end of the year and determined that €475,000 of

goods were on hand. In addition, the following items were not included in the physical

count. Bell, Inc. determined that €60,000 of goods were in transit that were shipped f.o.

destination (goods were actually received by the company three days after the inventory

count). On the last day of the year, the company sold €25,000 worth of inventory f.o.

destination. What amount should Bell report as inventory at the end of the year?

a. €475,000.

b. €535,000.

c. €500,000.

d. €560,000.

91. Risers Inc. reported total assets of £1,200,000 and net income of £135,000 for the

current year. Risers determined that inventory was overstated by £10,000 at the

beginning of the year (this was not corrected). What is the corrected amount for total assets and net income for the year?

a. £1,200,000 and £135,000.

b. £1,200,000 and £145,000.

c. £1,190,000 and £125,000.

d. £1,210,000 and £145,000.

92. Risers Inc. reported total assets of £1,600,000 and net income of £85,000 for the current

year. Risers determined that inventory was understated by £23,000 at the beginning of

the year and £10,000 at the end of the year. What is the corrected amount for total assets

and net income for the year?

a. £1,610,000 and £95,000.

b. £1,590,000 and £98,000.

c. £1,610,000 and £72,000.

d. £1,600,000 and £85,000.

Use the following information for questions 93 through 95.

Hudson, Inc. is a calendar-year corporation. Its financial statements for the years 2019 and 2018 contained errors as follows:

Valuation of Inventories: A Cost-Basis Approach

2019 2018

Ending inventory €3,000 overstated €8,000 overstated

Depreciation expense €2,000 understated €6,000 overstated

Valuation of Inventories: A Cost-Basis Approach

d. €1,176.

Test Bank for Intermediate Accounting: IFRS Edition, 3e

1. By how much should the account payable be adjusted on May 31?

a. €0.

b. €344.

c. €320.

d. €296.

Use the following information for questions 99 and 100.

The following information was available from the inventory records of Rich Company for January:

Units Unit Cost Total Cost

Balance at January 1 3,000 €9 €29,

Purchases: January 6 2,000 10 20, January 26 2,700 10 28,

Sales: January 7 (2,500) January 31 (4,000) Balance at January 31 1,

1. Assuming that Rich does not maintain perpetual inventory records, what should be the inventory at January 31, using the weighted-average inventory method, rounded to the nearest dollar?

a. €12,606.

b. €12,284.

c. €12,312.

d. €12,432.

1. Assuming that Rich maintains perpetual inventory records, what should be the inventory at January 31, using the moving-average inventory method, rounded to the nearest dollar?

a. €12,606.

b. €12,284.

c. €12,312.

d. €12,432.

Use the following information for questions 101 and 102.

Niles Co. has the following data related to an item of inventory:

Inventory, March 1 100 units @ £4.

Purchase, March 7 350 units @ £4.

Purchase, March 16 70 units @ £4.

Inventory, March 31 130 units

1. The value assigned to cost of goods sold if Niles uses FIFO is

a. £579.

b. £552.

How is a significant amount of consignment inventory reported in the statement of financial position?

Where does inventory go on a statement of financial position?

Why are inventories measured at lower of cost and net realizable value?

Why is inventory included in the computation of net income?