Wiley GAAP 2008

Concepts, Rules, and Examples

Ownership of Goods

Generally, in order to obtain an accurate measurement of inventory quantity, it is necessary to determine when title legally passes between buyer and seller. The exception to this general rule arises from situations when the buyer assumes the significant risks of ownership of the goods prior to taking title and/or physical possession of the goods. Substance over form in this case would dictate that the inventory is an asset of the buyer and not the seller, and that a purchase and sale of the goods be recognized by the parties irrespective of the party that holds legal title.

The most common error made in this area is to assume that an entity has title only to the goods it physically holds. This may be incorrect in two ways: (1) goods held may not be owned, and (2) goods that are not held may be owned. Four issues affect the determination of ownership: (1) goods in transit, (2) consignment arrangements, (3) product financing arrangements, and (4) sales made with the buyer having the right of return.

Goods in transit

At year‐end, any goods in transit from seller to buyer must be included in one of those parties' inventories based on the conditions of the sale. Such goods are included in the inventory of the firm financially responsible for transportation costs. This responsibility may be indicated by shipping acronyms such as FOB, which is used in overland shipping contracts, or FAS, CIF, C&F, and ex‐ship, which are used in maritime ...