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How to Account for a ConsignmentConsignment 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 GoodsWhen 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:
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 ConsigneeWhen 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 TRUE-FALSE—Conceptual AnswerNo.Description T1.Work-in-process inventory. F2.Merchandising and manufacturing inventory accounts. T3.Disclosure of manufacturer’s inventory components. T4.Goods in transit FOB shipping point. F5.Reporting inventory on consignment. T6.Allocating cost of goods available for sale. F7.Perpetual inventory system. F8.Determining when title passes. T9.Overstatement of purchases and ending inventory. F10.Period vs. product costs. T11.Reporting Purchase Discounts Lost. F12.Capitalizing interest costs. F13.Accounting for a trade discount. F14.Accounting for freight costs. T15.Abnormal freight costs. T16.Valuing agricultural inventories. T17.Specific identification method. F18.Specific identification method. F 19.Cost flow assumption. T20.FIFO periodic vs. perpetual system. F*21.LIFO perpetual vs. LIFO periodic. T*22.Purchase commitments. F*23.Using LIFO for reporting purposes. F*24.LIFO liquidation. T*25.LIFO liquidations. F*26.Dollar-value LIFO method. F *27.LIFO-FIFO comparison. T*28.LIFO conformity rule. F*29.Selection of inventory method. T*30.Appropriateness of LIFO. MULTIPLE CHOICE—Conceptual AnswerNo.Description c31.Identify manufacturer inventory similar to merchandise inventory. b32.Classification of raw materials. b33.Accounts included in inventory. b34.Reporting inventory in financial statements. c35.Reporting merchandise inventory. How is a significant amount of consignment inventory reported on the balance sheet?How is a significant amount of consignment inventory reported in the balance sheet? The inventory is reported separately on the consignor's balance sheet.
What inventory is recorded in statement of financial position?Inventory is a current asset account found on the balance sheet, consisting of all raw materials, work-in-progress, and finished goods that a company has accumulated. It is often deemed the most illiquid of all current assets and, thus, it is excluded from the numerator in the quick ratio calculation.
Why are inventories measured at lower of cost and net realizable value?Obsolescence, over supply, defects, major price declines, and similar problems can contribute to uncertainty about the “realization” (conversion to cash) for inventory items. Therefore, accountants evaluate inventory and employ lower of cost or net realizable value considerations.
Which of the following items must not be reported as inventory?The correct answer is Option (d). Machinery used in the production process will not be classified as inventory.
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How is a significant amount of consignment inventory reported in the statement of financial position?
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