 Hello and welcome to the session in which we will discuss the cost of inventory. In the prior session, we looked at the inventory account itself. Inventory for many companies is a large portion of their assets, especially if you are a retailer or if you are a manufacturer. This topic is heavily covered on the CPA exam, as well as it in your intermediate accounting and financial courses. Whether you are an accounting student or a CPA candidate, I strongly suggest you take a look at my website, farhatlectures.com. I don't replace your CPA review course. I'm a useful addition to your CPA review course. I work along your CPA review course. I explain the theory behind the concept. I illustrate additional concept. I go a little bit more in depth to help you improve your score by 10 to 15 points by helping you understand the material better. Your risk is one month of subscription. Your potential gain is passing the exam. If not for anything, take a look at my website to find out how well or not well your university doing on the CPA exam. I do have resources for other college courses, such as governmental accounting, advanced accounting, managerial, audit, intermediate, so on and so forth. Multiple choice through false. My CPA supplemental resources are aligned with your becker, Wiley, Roger, Gleam, so you can go back and forth between your CPA review course and my material. And I also give you access to the AI CPA, previously released questions, almost 1500 of those questions, multiple choice questions with detailed solution. If you have not connected with me on LinkedIn, please do so. Take a look at my LinkedIn recommendation, like this recording, share it with other connect with me on social media, Instagram, Facebook, Twitter and Reddit. So it's included in the cost of inventory. The general rule is this, any cost necessary to bring the inventory to a saleable condition, saleable condition means you paid for everything and now you are ready to sell it. What will be some of these costs? Well, the purchase price usually is the largest cost. You might have to pay taxes. You might have to pay freight in, which is transportation, not freight out. And we're going to talk about freight in and freight out when we discuss a little bit more FOB shipping, FOB destination, specifically more about freight in. We also have to include any insurance while that inventory is in transit. Not once we have it and ready for sale before we have it ready. Any packaging, if we have to add packaging to the inventory, it gets added. Now, we will deduct any discount that we received for that inventory. If we are giving any discount, we deduct any returns and allowances. Few other issues we have to be aware of when it comes to count our inventory to find out what is the cost, because when you count the inventory, you have to assign a cost. Those are FOB shipping, FOB destination, free on board shipping, free on board destination. This topic, although it's covered in intermediate accounting, it's covered in business law, but believe it or not, it's tested on the audit section of the CPA exam because they ask you to, they might give you a simulation, asking you what's included in inventory and what's not included. We have to look at consigned goods and we have to look at sales with repurchase agreement and sales with high rate of return. I will keep those two for the next session. I will focus on FOB shipping, FOB destination and briefly covered consigned goods. So what is FOB shipping versus FOB destination? The question is, who owns the goods? Which is who owns the good while the goods are in transit? Now, now in the real world, we could be talking about goods being shipped from from China, from India, from all over the world, from Germany. The question is when those goods are on the plane, when those goods are on the train, when those goods are in the air or on the boat, whose good is it? Whose goods is it? Because you're supposed to recognize inventory at the time the company control the asset. So at what time you control the asset, record the asset and record its related liability. Well, who owns the good? Well, we're going to look at two options and I'm going to simplify things to illustrate the concept of FOB shipping, FOB destination. Let's assume you ordered a pizza. You pick up the phone and you call your local pizza. Basically, think of it, picking up the phone, emailing them, faxing them, sending them a letter, placing an order on the app. It doesn't matter. You order a pizza. Well, there are two options for you to receive that pizza. And here are the two options. Basically, it boils down to two options. Option one, you drive your own car, you pick up the pizza yourself or you hire someone to pick up the pizza for you. Simply put, you pay for the shipment and you go there and you pick it up yourself. The other option is to do what? Order that pizza and ask the pizzeria to deliver the pizza to your home. So those are the two options. You could either take care of it yourself, take care of the delivery yourself, go pick it up yourself or hire someone on your behalf. Or you can ask the pizzeria, the supplier of the pizza to ship it to you. And I'm sure you guys are familiar with those two options. Here we go. When we buy something and it's FOB shipping, when we say it's FOB shipping, the risk of loss is with the buyer. FOB shipping is basically option one. FOB shipping option one. Option one means what? It means you drove your car to that pizzeria place. You pick it up, you pick up the pizza. Once that pizza is in your car, let's assume you were speeding and you press on the brake by mistake and the pizza fall and now it's bad. You can no longer eat that pizza because now it's smushed. Guess what? You have the risk of loss. It's your pizza. Therefore, the pizza is considered part of your inventory. You bought it FOB shipping. So the title transfer, as soon as you leave the pizzeria, once they gave you the pizza, you step outside their door. It becomes your pizza. You bought this pizza FOB shipping. Again, you could either drive your car or hire someone to pick it up. Or you can buy this pizza or buy this product FOB destination. What is FOB destination? FOB destination is the risk of the loss. Stays with the seller until they deliver it to you. So if they use their delivery person, that delivery is the risk. If anything happened on the road, that pizza gets mushed because the delivery person got into an accident. You're not responsible for that. It's FOB destination. So here's what you need to know. If you purchase something and that something is FOB shipping, you want to pick it up in transit, it's your inventory. So let's assume that pizza, it's on the route. And let's assume something other than pizza. You purchase something from Germany, FOB shipping. Well, that's something on the plane. It's FOB shipping. It's your inventory. If it's FOB destination, it's not in your inventory. Why? Because it's not yours until they deliver it. They may fail to deliver it. Who knows? I don't know. If something happened, they're responsible for the product. Maybe on the way, they might find a buyer that can buy this inventory from them at a higher price. That's fine. They bear the risk and the reward. You have nothing to do with it. So you want to make sure you know the difference between FOB shipping and FOB destination. If you buy that pizza and you pick it up yourself, it's your pizza on the way home. If you order that pizza and they deliver it, it's their pizza when it's the way delivered to you. The next thing we have to be aware of is consigned goods. And the best example I can give you about consigned goods is PepsiCo and Walmart. And the reason I like this example, because one Christmas when I was in college, I work at Walmart. I remember I used to work the third shift, which was from, let me think, from 11 till 7 or from 10 till 8. I don't remember, but something before midnight till early in the morning. And every day early in the morning, it's funny. I will see a person from PepsiCo as I'm leaving, a person from PepsiCo walking in, walking in. And I just, I find it unusual that this person visits the store every time. I wasn't aware of this until one night I asked them, you know, I would like to work, you know, in the soda department and, you know, refill the, that was my, that was my job, is to basically restag the shelves. So that day I did not have any PepsiCo products. I'm not sure if I asked for it or I was assigned. I believe I was assigned to the soda section. And for some reason I did not have any PepsiCo product. And I asked the person I'm working with, the senior, the manager. I don't remember. I asked them, why don't we refill the PepsiCo shelves? And the person told me, well, there's a PepsiCo guy that comes in every day and refill the shelves. Why? The goods, the PepsiCo goods were goods, consigned goods. So they were not really Walmart's goods. The goods are present at Walmart's store, but they're not part of our inventory. They're not part of Walmart. Why? Because all what PepsiCo does is PepsiCo come in, they refill the shelves, put the new prices, feed that information into the Walmart system. And that's it. And Walmart don't take ownership of the goods. So the goods are part of PepsiCo, although they are sitting in Walmart. Walmart have the physical possession of them, but they're not really part of Walmart. OK, so what happened is this, once you pick up something from Walmart shelves, that's a PepsiCo product, you go to the register and once it's sold, Walmart will technically submit the funds to PepsiCo minus a commission. So Walmart makes their profit from a commission, so they don't buy PepsiCo product. All what they do is they tell PepsiCo you can place the goods basically like in, quote, renting the shelves. And what's going to happen? What's going to have to happen? Walmart will have to disclose this information under financial statements and they cannot include this information under, they cannot include the inventory. Remember what we talked about in the prior session? If you overstate your inventory, you understate cost of goods sold. So they cannot include this inventory part of their PepsiCo product, part of their ending inventory. Meanwhile, PepsiCo can include ending inventory that's sitting in Walmart stores, although they don't have it, they have it in another store, but it's their inventory. And this is about the consigned good. In the next session, we would look at sales with repurchase agreement and sales with high rate of return. Again, at the end of this recording, I'm going to invite you to visit my website, farhatlectures.com, and invite you to consider subscribing, whether you are a CPA candidate or an accounting student. I provide you alternative explanation, backup explanation. You can improve your score by understanding the material better. I don't replace your CPA review course. You keep that. I just, you have me in addition for a nominal fee and your risk is one month. You give it a try. You like it. You feel it's helping you. You keep it. You feel it's not helping you. Go ahead and cancel your risk one month. Your potential gain is passing the exam. Good luck. Study hard. 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