Question

Presented below is a list of items that may or may not be reported as inventory in a company’s December 31 balance sheet.

Indicate which of these items would typically be reported as inventory in the financial statements. If an item should not be reported as inventory, indicate how it should be reported in the financial statements.

Item in Financial
Financial Statement Statement

1. Goods out on consignment at another company’s store.
2. Goods sold on an installment basis (bad debts can be reasonably estimated).
3. Goods purchased f.o.b. shipping point that are in transit at December 31.
4. Goods purchased f.o.b. destination that are in transit at December 31.
5. Goods sold to another company, for which our company has signed an agreement to
repurchase at a set price that covers all costs related to the inventory.
6. Goods sold where large returns are predictable.
7. Goods sold f.o.b. shipping point that are in transit at December 31.
8. Freight charges on goods purchased.
9. Interest costs incurred for inventories that are routinely manufactured.
10. Costs incurred to advertise goods held for resale.
11. Materials on hand not yet placed into production by a manufacturing firm.
12. Office supplies.
13. Raw materials on which a manufacturing firm has started production but which are not
completely processed.
14. Factory supplies.
15. Goods held on consignment from another company.
16. Costs identified with units completed by a manufacturing firm but not yet sold.
17. Goods sold f.o.b. destination that are in transit at December 31.
18. Short-term investments in stocks and bonds that will be resold in the near future.

Answer 1

The classification of inventory items on the balance sheet varies depending on the nature of ownership, terms of sale, and stage within the supply chain. Consignment goods, goods in transit f.o.b. shipping point, work-in-process, and finished goods are reported as inventory. Other items like sold goods, f.o.b. destination goods, and office supplies have different classifications such as receivables, expenses, or different types of assets.

Step-by-step explanation:

When analyzing a balance sheet, it is critical to classify each item correctly. For the list provided, here are the classifications:

• Goods out on consignment would typically be reported as inventory because although they are at another company's store, they have not been sold.
• Goods sold on an installment basis should not be classified as inventory since they are sold, even though payments are pending. They would be accounted for as receivables with an allowance for doubtful accounts.
• Goods purchased f.o.b. shipping point in transit would be included in inventory because the ownership has transferred to the buyer when goods are shipped.
• Goods purchased f.o.b. destination in transit are not reported as inventory because ownership transfers upon delivery, not when shipped.
• Goods sold under a repurchase agreement might be reported as inventory due to the obligation to repurchase, depending on the terms and substance of the agreement.
• Goods with predictable large returns should have an allowance for returns, affecting both revenues and inventory.

Items such as freight charges, interest costs, advertising costs, office supplies, and factory supplies are not inventory but rather period expenses or assets that are expensed when used. Materials not yet in production, work-in-process, and finished goods not yet sold are included in inventory for manufacturing firms. Goods held on consignment from another company should not be included in the inventory of the holding firm as they still belong to the consignor. Finally, short-term investments are not classified as inventory but as current investments on the balance sheet.