FAR · Select balance sheet accounts · 9 practice questions
Correct Ending Inventory: Consignment and FOB Terms
Ending inventory includes goods you own at year-end, not just goods in your warehouse. Below: a worked calculation and free practice on ownership adjustments, shipping terms, and consignment.
Try one first
Hint
Determine legal title at year-end for each group (consignment, FOB shipping point, FOB destination); ownership, not physical location, dictates inclusion.
Answer D. Start with the physical count of $600,000. Exclude the $30,000 consigned goods (Lane does not own them), include the $20,000 purchase in transit shipped FOB shipping point (title passed on shipment), and include the $45,000 goods sold FOB destination still in transit (title has not passed). Ending inventory = 600,000 − 30,000 + 20,000 + 45,000 = $635,000.
Why not A: Tempting because it uses the physical count as reported. It's wrong because the physical count included $30,000 of consigned goods that Lane does not own and omitted two groups Lane did own in transit, so adjustments are required.
Why not B: Tempting because it removes the $30,000 consignment and includes the $45,000 sold FOB destination (600 − 30 + 45 = 615). It's wrong because it omits the $20,000 purchase shipped FOB shipping point, which should be included since title passed on shipment.
Why not C: Tempting because it adds both in-transit amounts to the physical count (600 + 20 + 45 = 665). It's wrong because it fails to remove the $30,000 consigned goods that were included in the count but are not Lane's, causing an overstatement.
Worked example
At December 31, Cedar Co.'s warehouse count is $300,000 at cost. It excludes a $10,000 purchase shipped FOB shipping point on December 30 and still in transit at year-end. Ownership follows the stated shipping terms. No valuation adjustment is needed.
| 1 | Start with the warehouse count$300,000 | $300,000 |
| 2 | Add the purchase owned since shipment+ $10,000 | $10,000 addition |
| 3 | Calculate corrected ending inventory$300,000 + $10,000 = $310,000 | $310,000 |
Cedar should report ending inventory of $310,000 at December 31.
Check: Shortcut: owned but not counted means add $10,000; waiting for delivery does not change year-end ownership.
Key points
- Consigned-in goods belong to the supplier; consigned-out goods remain yours until sold.
- Use inventory cost, not the selling price, for goods shipped to customers.
- FOB shipping point transfers ownership when goods reach the carrier, not when they are billed.
- After ownership adjustments, stop if the question says no valuation adjustment is needed.
How the exam traps you
- Adding a FOB destination purchase that is still in transit. Exclude it until delivery because the seller still owns it.
- Keeping consigned-in goods because they are in your warehouse. Subtract them if the count includes them; you do not own them.
- Adjusting again for goods already correctly included or excluded. Compare ownership with the starting count before adding or subtracting.
Question 2
| Inventory Item | Amount |
|---|---|
| Goods physically on hand | $120,000 |
| Goods on consignment at a dealer | $18,000 |
| Goods purchased from a supplier, shipped FOB shipping point on December 30 and still in transit at year-end | $14,000 |
| Goods purchased from a supplier, shipped FOB destination on December 31 and still in transit at year-end | $11,000 |
| Goods sold to a customer, shipped FOB shipping point on December 29 and still in transit at year-end | $9,000 |
Hint
For each item, ask who owns the goods at year-end. Physical location alone does not decide inventory.
Answer C. Include goods physically on hand ($120,000), goods on consignment ($18,000), and purchases shipped FOB shipping point that were in transit at year-end ($14,000) because title passed on shipment. Exclude the FOB destination purchase ($11,000) because title passes on delivery, and exclude goods sold FOB shipping point ($9,000) because title passed to the customer when shipped. Total ending inventory = $120,000 + $18,000 + $14,000 = $152,000.
Why not A: This equals $120,000 + $18,000 and reflects including only goods on hand and consigned goods but omitting the FOB shipping point purchase in transit. Under FOB shipping point, Pine owns goods once they are shipped, so excluding the $14,000 understates inventory.
Why not B: This equals $120,000 + $14,000 + $9,000 and results from including the FOB shipping point purchase in transit but mistakenly including goods sold to the customer (FOB shipping point) while excluding consigned goods. Sold goods left Pine's ownership at shipment, and consigned goods still belong to Pine, so this choice is incorrect.
Why not D: This equals $120,000 + $18,000 + $14,000 + $11,000 and reflects including the FOB destination purchase in transit. Pine does not own FOB destination goods until delivery, so including the $11,000 overstates inventory.
Question 3
Hint
Carefully determine ownership at year‑end: title passes at shipment for FOB shipping point but at delivery for FOB destination; exclude consigned goods that belong to someone else.
Answer C. Start with the $150,000 ledger balance. Add $12,000 for purchases in transit (FOB shipping point, buyer owns at shipment) and add $7,000 for goods shipped FOB destination (seller retains title until delivery). Subtract $20,000 for goods sold FOB shipping point that remain on the ledger and subtract $9,000 of consigned goods that belong to Supplier Y. Net = 150,000 + 12,000 + 7,000 - 20,000 - 9,000 = $140,000.
Why not A: This corresponds to failing to include the $12,000 purchase in transit. Under FOB shipping point the buyer obtains title at shipment, so those goods must be added even if not physically received.
Why not B: This arises if you apply the other adjustments correctly but forget to include the $7,000 of goods shipped FOB destination. Because title remains with the seller until delivery, those goods should be included in inventory.
Why not D: This is the unadjusted ledger balance. It's tempting if you trust the recorded amount, but the ledger here incorrectly includes consigned and sold goods and omits purchases in transit and FOB‑destination goods, so adjustments are required.
Question 4
Hint
Focus on who owned each item at December 31, not on who had physical possession or who had already recorded a sale or purchase.
Answer C. Delta should include items 1, 4, and 5, totaling $210,000. Item 1 remained Delta's inventory at year-end because, although sold, the goods had not been delivered to the carrier before Dec. 31 (under FOB shipping point title transfers on shipment). Item 4 remains inventory because under FOB destination the seller retains title until the buyer receives the goods. Item 5 was shipped FOB shipping point on Dec. 31, so title passed to Delta before year-end even though Delta received the goods in January.
Why not A: This total reflects including items 1 and 4 but excluding item 5. It is tempting if a candidate assumes goods not physically received by Delta (item 5) are excluded even though the vendor shipped them FOB shipping point before year-end. Under FOB shipping point title passes on shipment, so item 5 should be included.
Why not B: This total reflects including item 2 (items 1, 2, and 4). Candidates are tempted to treat all goods in transit as the buyer's inventory, but item 2 was shipped FOB destination, so title did not pass to Delta until delivery on January 3 and it should be excluded at December 31.
Why not D: This total reflects including items 1, 2, 4, and 5, i.e., treating the FOB destination purchase (item 2) as buyer-owned while excluding only consigned goods. It appeals to candidates who broadly assume goods on hand or in transit are Delta's inventory and fail to apply FOB destination and consignment rules correctly.
Question 5
Hint
Focus on who has legal title at year-end for each item, not just where the goods are located.
Answer A. Start with the physical count of $600,000. Exclude the $18,000 of goods held on consignment for another company because Harper does not own them. Include the $25,000 sold FOB destination (title had not passed at year-end) and include the $12,000 shipped to a consignee (Harper retains title until sale). The $40,000 sold FOB shipping point is excluded because title passed on shipment.
Why not B: This reflects removing the $18,000 consigned goods and adding the $25,000 FOB destination shipment, but it fails to include the $12,000 Harper still owns that was shipped to a consignee.
Why not C: This reflects removing the $18,000 consigned goods and adding the $12,000 shipped to Harper's consignee, but it omits the $25,000 FOB destination shipment. FOB destination goods in transit at year-end remain the seller's inventory.
Why not D: This reflects adding both the $25,000 FOB destination shipment and the $12,000 shipped to the consignee but forgetting to remove the $18,000 of consigned goods that belong to another company.
Question 6
Hint
Determine legal ownership at year-end: identify which consignments and FOB terms make the goods Lark's or not.
Answer D. Inventory is based on legal ownership, not physical location. Start with the $480,000 physical count, add $30,000 (goods Lark shipped on consignment remain Lark's), add $20,000 (purchases in transit shipped FOB shipping point are owned by the buyer), add $25,000 (goods sold FOB destination remain Lark's until delivered), and subtract $15,000 (goods Lark holds on consignment for another company are not Lark's). Ending inventory = 480,000 + 30,000 + 20,000 + 25,000 − 15,000 = $540,000.
Why not A: Tempting because it recognizes that the $30,000 shipped on consignment still belong to Lark; wrong because it omits the $20,000 purchases in transit (FOB shipping point) and the $25,000 goods sold FOB destination that Lark still owns at year-end.
Why not B: Tempting because it includes the $20,000 FOB shipping point purchase and the $25,000 goods sold FOB destination; wrong because it treats the $30,000 Lark shipped on consignment as not belonging to Lark, so it fails to add those goods.
Why not C: Tempting because it adds all excluded items to the physical count, but wrong because it fails to subtract the $15,000 of goods Lark was holding on consignment for another company, which are not Lark's inventory.
Question 7
Hint
Begin with the physical count, then evaluate each item based on who owned the goods at December 31 and whether any related freight belongs in inventory cost.
Answer B. Start with the physical count of $1,240,000. Include the FOB shipping-point purchase plus freight-in (86,000 + 4,000 = 90,000) and include the $52,000 shipped FOB destination because title remained with Ridge at year-end. Exclude the $31,000 of consigned-in goods that belong to another company and include Ridge's $27,000 of goods out on consignment. Total = 1,240,000 + 90,000 + 52,000 - 31,000 + 27,000 = $1,378,000.
Why not A: This answer results from excluding the $52,000 of goods shipped FOB destination; those goods remained Ridge's inventory at year-end because title did not transfer until delivery to the customer.
Why not C: This answer comes from failing to add Ridge's goods out on consignment ($27,000). Even though they were not on-site, Ridge retained ownership and must include them in inventory.
Why not D: This answer arises from including the $31,000 of consigned-in goods that belong to another company. Those goods were physically present but are not Ridge's inventory and should be subtracted.
Question 8
Hint
Separate physical location from ownership. Then analyze each excluded item by asking whether title had passed by year-end.
Answer B. Start with the physical count of $2,000,000, then remove the $120,000 of consigned-in goods because Rilo does not own them. Add the $90,000 purchase shipped FOB shipping point (title passed when shipped) and add the $80,000 consigned-out goods because consignors retain ownership. Do not add the $70,000 FOB destination purchase (title passes on delivery) or the $110,000 sold FOB shipping point (title passed to the buyer on shipment). The resulting inventory is $2,050,000.
Why not A: This result comes from treating the goods sold FOB shipping point (the $110,000) as still owned because they are in transit; FOB shipping point transfers title at shipment, so those goods are not Rilo's inventory and should not be added.
Why not C: This choice typically results from incorrectly including the $70,000 FOB destination purchase. Under FOB destination, title does not pass to the buyer until delivery (which occurs after year-end), so that purchase should be excluded at December 31.
Why not D: This understates inventory by excluding the $80,000 consigned-out goods. Goods sent on consignment remain the consignor's inventory until sold by the consignee, so Rilo should include those consigned-out goods.
Question 9
Hint
Decide ownership at year-end for each item (ownership, not location, determines inclusion). Apply FOB shipping point/destination and consignment rules before totaling.
Answer C. Decide ownership at year-end for each item. Vega does not own the goods sold FOB shipping point ($50,000) because title passed at shipment; it does own the goods sold FOB destination ($30,000) because title had not passed, the purchased goods shipped FOB shipping point ($40,000) because title passed to Vega at shipment, and the consigned goods ($70,000) because title remained with Vega. Add these to the physical count: 1,200,000 + 30,000 + 40,000 + 70,000 = 1,340,000.
Why not A: Tempting because a student might correctly include the in-transit purchase ($40,000) and the FOB-destination sale ($30,000) but mistakenly treat consigned goods as not owned, omitting the $70,000 consigned amount. Consigned goods remain the consignor's inventory until sold and should be included.
Why not B: Tempting because a student might include the FOB-destination sale ($30,000) and the consigned goods ($70,000) as still owned but omit the purchased goods in transit shipped FOB shipping point ($40,000). It's wrong because the $40,000 purchase passed title to Vega at shipment and must be included.
Why not D: Tempting because a student might incorrectly include the goods sold FOB shipping point ($50,000) as still Vega's while failing to include the FOB-destination goods ($30,000) that Vega actually still owned, which yields $1,360,000. It's wrong because title on the FOB shipping point sale passed to the buyer at shipment; the $50,000 should be excluded and the $30,000 FOB-destination amount included instead.
Common questions
How do I calculate ending inventory from a physical count?
Start with the count, subtract nonowned goods included, and add owned goods omitted. Do not adjust items already treated correctly.
What goods in transit are included in ending inventory?
Include purchases shipped FOB shipping point and sales shipped FOB destination that remain in transit at year-end. Exclude purchases shipped FOB destination and sales shipped FOB shipping point.
Do consigned goods count as inventory?
The consignor includes unsold consigned goods, even when a retailer holds them. The consignee excludes those goods, even when its physical count includes them.
Practice FAR like the real exam
The free ChatCPA simulator: real exam layout, timed testlets, starting with a question on this topic. No account needed to start.
Open the free simulator →More on Inventory
Questions from the ChatCPA bank of 17,658 CPA exam questions, each with a written reason for every wrong answer. ChatCPA is built by Nicholas Miller, CPA (Oregon #14907). How these pages are made. Spot an error? Tell us.