Chapter 5, Problem 1E

To determine

Free on board:

Free on Board in short known as FOB, defines whether a buyer or a seller will be responsible for the ownership of the goods based on the geographical location of the goods and the contract entered there in. There are two types of FOB –FOB Shipping and FOB Destination.

FOB shipping: Under this contract when the goods are placed at the port for the shipment, the ownership of the goods transfers to the buyer. And now the buyer will incur the expenses (freight expense or the transportation expense) or even the loss if anything happens to the goods, from the point of goods placed for delivery.

FOB destination: Under this contract until the goods does not reaches the delivery point of the buyer, the ownership of goods remain with the seller. Thus the seller will incur the expense or the loss if anything happens to the goods before being delivered to the buyer at the stated delivery location.

Inventory: Inventory refers to the stock or goods which will be sold in the near future and thus is an asset for the company. It comprises of the raw materials which are yet to be processed, the stock which is still going through the process of production and it also includes completed products that are ready for sale. Thus inventory is the biggest and the important source of income and profit for the business.

Consignment: Consignment is an agreement between the seller and the agent wherein the agent takes the responsibility of selling the goods on the seller‘s behalf to the buyer or the third party though the ownership of the goods remains with the seller until goods are sold to the actual buyer.

Consignor: The one who discharges the duty of selling the products to the ultimate buyer to an agency or an agent is known as the consignor.

Consignee: The one who works as an agent for a seller and takes the responsibility to vend or sell the goods by charging commission for the same is the consignee.

To identify: 1.The closing inventory amount to be included in the balance sheet of which company.

2. Consignor and consignee in case of the two companies and the company which will include the unsold goods as a part of its inventory