Question

Peete Company identifies the following items for possible inclusion in the physical inventory. Indicate whether each item should be included or excluded from the inventory taking. Goods shipped?

1) Included
2) Excluded

Answer 1

Goods shipped should be included in a company's physical inventory if they are shipped FOB shipping point because ownership transfers to the buyer upon shipment. If goods are shipped FOB destination, they should be excluded as the seller retains ownership until delivery.

Step-by-step explanation:

When determining whether to include or exclude goods in a physical inventory count, it is important to consider the terms of ownership. Specifically, one must assess whether the goods are in transit and who has the legal title at the time of the inventory count. Generally, goods that have been shipped should be included in the inventory if they are shipped FOB (Free On Board) shipping point, meaning the buyer takes ownership once the goods are shipped. Conversely, goods should be excluded if they are shipped FOB destination, meaning the seller retains ownership until the goods reach their destination.

• Goods shipped FOB shipping point: Included in inventory
• Goods shipped FOB destination: Excluded from inventory

It is crucial for the accuracy of financial records that the correct inclusion or exclusion is made during inventory taking.