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FOB shipping point

At the end of an accounting period , companies need to determine the quantity of inventory they own as of that date . Usually , this is a two - step process : 1) taking a physical count of inventories ; and 2) determining the ownership of goods.

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FOB shipping point

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  1. At theend of an accountingperiod, companiesneedtodeterminethequantity of inventorytheyown as of thatdate. Usually, this is a two- step process: • 1) taking a physicalcount of inventories; and • 2) determiningtheownership of goods.

  2. When companies take a physical count, they actually count, weigh or measure each kind and item of inventory they have on hand.

  3. Goods in transit are goods that are en route to the company ( purchases) or en route to a customer ( sales).

  4. The ownership of goods is determined by the terms of sale, i. e., FOB destinationor FOB shipping point.

  5. FOB shipping point • if a company in Ankara purchases goods from a company in Trabzon, it would own the goods on the truck to Ankara on the day of the physical count

  6. FOB destination • The company in Trabzon owns the goods until they reach Ankara, and therefore these goods must not be included in the inventory of the company in Ankara

  7. Consignment • A marketing arrangement between the consignor ( the owner of the goods) and the consignee ( the holder of the goods).

  8. Consignment • Theconsigneesellsthegoods on behalf of theconsignor, therebyearning a commissionfromthesale. Since theconsigneedoes not ownthemerchandise, sheshould not include it in her inventory. However, theconsignorshouldincludethesegoods in her inventory.

  9. Example: Momentus Corp. • MomentusCorp. is a wholesaledistributor of TV setsand has alreadycompletedthephysicalcount of thegoodsstored in itswarehouseandshowroom on 31 December 2014.

  10. Example: Momentus Corp. • a. The total quantity of TV setscountedphysically on companypremises on 31 December 2014 was 250 units.

  11. Example: Momentus Corp. • b. Therewere 15 units of goodsthatwereshippedtoFinsCompany FOB destination on 29 December 2014 andwerestill in transit at year- end.

  12. Example: Momentus Corp. • c. Momentusimported 20 TV setsfrom a manufacturer in Japan withtheterm FOB shippingpoint on 15 December 2014, andtheexpected time of arrival of thegoods is 10 January 2015.

  13. Example: Momentus Corp. • d. Included in thecounted TV setswere 21 unitsthatwereheld on consignmentfromanothercompany.

  14. Example: Momentus Corp. • e. MomentusCorp. held a total of 50 TV sets at variousshowrooms on consignment. Since thesesetswere not in thewarehouse of Momentusduringthephysicalcount, theywere not included in thequantity of physicalinventory.

  15. Example: Momentus Corp. What is the correct number of TV sets that Momentus Corp. owns, as of 31 December 2014?

  16. Thequantity of inventoryestablishesthebasisfordeterminingtheinventory’svalue as reported in the fi nancialstatements, andthereforetheidentification of physicalinventory is crucialto a fairpresentation of the fi nancialposition of anycompany.

  17. This method can be used when the actual cost of an item is traceable.

  18. let’s assume that Kompucomp Ticaret sells computers with specifi c features. During the period, the company buys three computers with the same specifi cations at costs of TL 700, TL 800 and TL 1.000, respectively, and sells two of them.

  19. At year end, the company determines that the computer which cost TL 800 is still on hand. Accordingly, the Ending Inventory is TL 800, and the Cost of Goods Sold is TL 1.700 ( TL 700 + TL 1.000).

  20. The First- in First- out ( FIFO) and Weighted Average methods assume that the flow of costs may be unrelated to the physical flow of goods.

  21. Net realizable value ( NRV) of inventory is the net amount ( expected sales price less costs to sell) that a company expects to receive from the sale of these inventories in the future.

  22. In order not to overstate the statement of financial position amount, IFRS specifies that companies shall measure inventories on the lower- of- cost- or net realizable value basis.

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