Inventory Purchase

Question: Rider Inc. (the sporting goods company) buys a bicycle for resell purposes and records the transaction

using either a perpetual or periodic system. When should an inventory purchase be recorded? Assume, for

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example, that Builder Company (the manufacturer of this bicycle) is located in Wisconsin, whereas the retail store

operated by Rider is in Kentucky. Delivery takes several days at a minimum. The precise moment for recording the

transaction is probably not critical except near the end of the year when the timing of journal entries can impact

the balances to be included on the financial statements.

To illustrate, assume this bicycle is ordered by Rider Inc. on December 27 of Year One. It is shipped by Builder

Company from Wisconsin on December 29 of Year One and arrives at the retail store on January 4 of Year Two.

When Rider produces its financial statements for Year One, should the inventory cost and related payable be

included even though the bicycle was not physically received until Year Two?

Answer: Documents prepared in connection with shipments made from a seller to a buyer are normally marked

with an “FOB” point. FOB stands for “Free On Board” (a traditional maritime term that has gained a wider use

over the years) and indicates when legal title to property is transferred. That is the moment that the bicycle is

assumed to be conveyed from one party to the other. It signifies the appropriate date for recording.