Question

Some firms that dispose of only a small part of their total output by consignment shipments fail to make any distinction between consignment shipments and regular sales. Which of the following would suggest that goods have been shipped on consignment?

a. Numerous shipments of small quantities.
b. Numerous shipments of large quantities and few returns.
c. Large debits to accounts receivable followed by small periodic credits.
d. Large debits to accounts receivable followed by large periodic credits.

Answer 1

To suggest that goods have been shipped on consignment, the financial records would indicate large debits to accounts receivable followed by small periodic credits, reflecting the gradual sale of goods by the consignee. The correct answer is option c.

Step-by-step explanation:

The question asks which of the following would suggest that goods have been shipped on consignment:

• a. Numerous shipments of small quantities.
• b. Numerous shipments of large quantities and few returns.
• c. Large debits to accounts receivable followed by small periodic credits.
• d. Large debits to accounts receivable followed by large periodic credits.

Sending goods on consignment means that goods are shipped to a third-party (the consignee) who will attempt to sell the goods for the owner (the consignor), but the consignor retains ownership until the sale takes place. In accounting terms, this is typically represented by keeping the goods as inventory on the consignor's balance sheet rather than as a sale.

The key financial tell-tale for consignment is the absence of significant immediate revenues from these transactions since payments are received only as the consignee sells the goods. Therefore, the correct option is c. Large debits to accounts receivable followed by small periodic credits.