FAR · Select balance sheet accounts · 6 practice questions
Who Owns Inventory? FOB Shipping Point, Destination, Consignment
Include goods you own at year-end, even when they are in transit or held elsewhere. Sort Lane's December 31 goods by ownership, then practice the same rule.
Try one first
Hint
Focus on who holds title at year‑end: apply FOB shipping point vs FOB destination rules and remember that consigned goods remain the consignor's inventory.
Answer C. Under FOB shipping point (Item 1), title passes to the buyer when the seller ships, so goods in transit belong to Crescent and are included. Under FOB destination (Item 2), title does not pass until delivery, so Crescent still owned those goods at year‑end and includes them. Consigned goods (Item 3) remain the consignor's, and goods shipped FOB destination by the seller (Item 4) remain the seller's until delivered, so both are excluded.
Why not A: This choice mistakes physical possession for ownership. Consigned goods (Item 3) are owned by the consignor (Beta) until sold, so Crescent should not include them.
Why not B: A candidate might add Item 3 because it's on Crescent's site, but consigned inventory belongs to the consignor and is excluded from Crescent's balance sheet.
Why not D: This distractor misapplies FOB rules. Item 4 was shipped FOB destination and title had not passed to Crescent as of year‑end, so it should be excluded; Item 1 (FOB shipping point in transit) should be included.
Sort it
Lane owns the goods at December 31.
Someone else owns the goods at December 31.
| Item | Goes to |
|---|---|
| Lane purchased goods FOB shipping point. The carrier accepted them December 30, and they were still in transit December 31. | Include in Lane's inventoryLane obtained title when the carrier accepted the shipment. Receipt is not required. |
| Lane holds a supplier's unsold goods in its warehouse on consignment. The supplier retains title. | Exclude from Lane's inventoryLane is the consignee, not the owner. Warehouse location does not change that. |
| Lane shipped goods to a customer FOB destination on December 30. They were still in transit December 31. | Include in Lane's inventoryLane retains title until delivery to the customer. |
| A supplier shipped goods to Lane FOB destination on December 30. Lane received them the following January 2. | Exclude from Lane's inventoryThe supplier still owned the goods on December 31 because delivery had not occurred. |
| Lane's partially assembled units were at a painting subcontractor on December 31. Lane retained title during processing. | Include in Lane's inventorySending goods elsewhere for processing does not transfer ownership when Lane retains title. |
| Lane sold goods FOB shipping point. The carrier accepted them December 31, but the customer had not received them. | Exclude from Lane's inventoryTitle passed to the customer on December 31. Later receipt does not delay that transfer. |
| Lane sent goods to a retailer on consignment. They remained unsold at the retailer on December 31. | Include in Lane's inventoryLane is the consignor and still owns the unsold goods. |
| Lane purchased goods FOB shipping point, shipped December 30 and still in transit December 31. Lane had not recorded the purchase. | Include in Lane's inventoryTitle passed at shipment. The missing purchase entry does not change ownership. |
| Lane sold goods FOB destination. The customer received them on December 31. | Exclude from Lane's inventoryDelivery transferred title to the customer by year-end. |
| Lane's merchandise was stored in a third-party warehouse on December 31. Lane retained title. | Include in Lane's inventoryOff-site storage does not change ownership. |
| Lane purchased goods FOB destination. They were delivered to Lane on December 31. | Include in Lane's inventoryDelivery transferred title to Lane by year-end. |
| Lane ordered merchandise FOB shipping point on December 30. The supplier had not shipped it by December 31. | Exclude from Lane's inventoryAn order is not shipment. Title has not passed to Lane. |
Key points
- Remember: Ask who owns the goods on December 31, not where the goods are.
- Use shipment or delivery dates, not order or invoice dates, to test year-end ownership.
- Adjust the physical count: add owned goods elsewhere and remove goods held for another owner.
How the exam traps you
- Counting everything in the warehouse and nothing in transit. Physical possession is not ownership. Consigned-in goods are excluded; owned goods off-site are included.
- Treating FOB shipping point as an automatic instruction to include inventory. Identify the buyer and seller first. At shipment, the buyer includes the goods and the seller excludes them.
- Letting recorded sales or purchases decide ownership. Entries can need correction. Apply the title-transfer terms even when the transaction was recorded incorrectly.
Question 2
Hint
For each group of goods, ask who owned the goods on December 31 under the shipping terms or consignment arrangement.
Answer C. Inventory is based on ownership, not just physical possession. Goods purchased FOB shipping point belong to Lane once shipped, so they should be included even though they are still in transit. Goods sold FOB destination remain Lane's inventory until they reach the customer, so those also stay in inventory at year-end. Consigned goods owned by the vendor should not be included in Lane's inventory.
Why not A: This choice correctly excludes consigned goods and keeps FOB destination sales in inventory, but it mistakenly treats an FOB shipping point purchase as excluded until receipt; ownership transfers on shipment under FOB shipping point, so Lane should include it while in transit.
Why not B: This option correctly treats the FOB shipping point purchase as belonging to Lane, but it incorrectly includes consigned goods (which are owned by the consignor) and incorrectly excludes FOB destination sales in transit (which remain Lane's until delivered).
Why not D: Relying solely on the physical count is incorrect here: the count included items Lane did not own (consigned goods) and excluded items Lane did own (the two groups in transit). Inventory is based on legal ownership at year-end, not only physical possession.
Question 3
Hint
For inventory classification at year-end, focus on who owns the goods on the balance sheet date, not just where the goods are located.
Answer D. Under a consignment arrangement, the consignor retains legal ownership of the goods until they are sold to an end customer. Here, Raine (the consignor) shipped goods to an unrelated consignee but did not transfer title. Because the goods remained unsold at December 31, they remain Raine's inventory even though they are held by the consignee.
Why not A: This is tempting because the goods are physically in transit at year-end, but under FOB shipping point title passes to the buyer upon shipment. Since Raine shipped the goods on December 29, ownership transferred then and the goods are not Raine's inventory on December 31.
Why not B: Under FOB destination terms, title passes when the goods arrive at the buyer's location. Because Raine did not receive the goods until January 2, 20X6, it did not own them on December 31 and they are not included in inventory.
Why not C: Although the goods are physically on Raine's premises and available for sale, consigned goods remain the property of the consignor until sold. Raine (the consignee) should not include another company's consigned goods in its inventory.
Question 4
Hint
Determine who held legal title at Dec 31 for each item, focus on FOB terms and consignment ownership rather than physical location.
Answer A. Legal title at the balance sheet date determines inventory inclusion. Omega includes item 2 because title passed to Omega when Supplier B shipped the goods (FOB shipping point); item 5 because Omega, as consignor, retains title to consigned goods until they are sold; and item 6 because Omega shipped those goods FOB destination and retains title until delivery. Items 1, 3, and 4 are excluded: item 1 passed title to the buyer at shipment (FOB shipping point), item 3 (purchased FOB destination) is still the seller's at Dec 31, and item 4 is owned by Manufacturer M under a consignment arrangement.
Why not B: Tempting because students may focus on physical possession and include in-transit goods; however item 1 was shipped FOB shipping point so title passed to the buyer at shipment and should be excluded. This choice also omits item 6, which Omega still owns (FOB destination).
Why not C: Includes item 1 and item 3 incorrectly. Item 1 (goods Omega shipped FOB shipping point) passed title to the buyer at shipment, and item 3 (purchased FOB destination) remains the seller's inventory at Dec 31 because title transfers on delivery.
Why not D: Incorrect because it omits item 6. Goods Omega shipped FOB destination (item 6) remain Omega's inventory until delivered, so they must be included at Dec 31.
Question 5
Hint
Determine legal ownership at year‑end (who holds title/risk): consigned goods remain with the consignor if title is retained; FOB shipping point transfers title at shipment, FOB destination at delivery.
Answer C. Morrow owns item 1 (finished goods physically in its warehouse) and item 2 (consigned goods for which Morrow retains legal title). Goods shipped to Morrow FOB shipping point (item 4) transfer title on shipment, so those in-transit units are Morrow's inventory. Item 3, shipped FOB destination and not yet delivered, remains the seller's inventory and is excluded.
Why not A: Attractive because physically held finished goods clearly belong in inventory, but this ignores that Morrow retained title on the consigned goods and therefore must include them; it also ignores FOB shipping-point in-transit goods.
Why not B: Plausible because in-warehouse and FOB shipping-point in-transit goods are included, but it incorrectly excludes the consigned goods. The stem states Morrow retained legal title on the consignment, so those goods remain Morrow's inventory.
Why not D: Partially tempting since consigned goods are correctly included, but this option wrongly includes item 3. Under FOB destination the seller retains title until delivery, so item 3 is not Morrow's inventory at year-end.
Question 6
Hint
Decide who owned the goods at year-end (FOB shipping point vs destination). Then apply the periodic formula COGS = Beginning inventory + Purchases − Ending inventory to determine the income effect of omitting inventory.
Answer C. Under FOB shipping point, title passed to R when the goods were shipped, so the in-transit merchandise should have been included in ending inventory and total assets. Because R recorded the $120,000 accounts payable, liabilities are correct. In a periodic system COGS = Beginning inventory + Purchases − Ending inventory, so omitting $120,000 from ending inventory increases COGS and therefore decreases net income and retained earnings for Year 1.
Why not A: This appeals to students who think recording the purchase prevents any COGS effect (or who confuse periodic with perpetual accounting). It fails because, in the periodic formula, a lower ending inventory increases COGS; purchases being recorded does not eliminate the impact of omitting ending inventory.
Why not B: This distractor tempts students who conflate physical possession with ownership or who assume the payable wasn't recorded. It fails because the stem explicitly states R recorded the $120,000 accounts payable, liabilities are correctly stated; only inventory (and thus total assets) is understated.
Why not D: This distractor tempts candidates who invert the relationship between ending inventory and COGS. It fails because with a lower ending inventory COGS increases (Beg + Purchases − End), which decreases net income, so net income and retained earnings would be understated, not overstated.
Common questions
Who includes FOB shipping point goods in transit at year-end?
The buyer includes them once the carrier accepts the shipment. The seller excludes them, even if the buyer has not received them.
Who includes FOB destination goods in transit at year-end?
The seller includes them until delivery to the buyer. The buyer excludes them until delivery.
Are consigned goods included in ending inventory?
The consignor includes unsold goods because it retains title. The consignee excludes those goods, even when they are in its warehouse.
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