Multiple Choice
Which of the following common events could result in inventory shrinkage discovered during a physical inventory count?
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5. Inventory
Physical Inventory Count, Ownership of Goods, and Consigned Goods
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Which of the following are two primary reasons why some industries use consignment arrangements for inventory?
A
To increase the cost of goods sold and to accelerate revenue recognition for the consignee
B
To transfer legal title to the consignee immediately and to simplify accounting for the consignor
C
To allow suppliers to retain ownership until the goods are sold and to reduce the financial risk for retailers
D
To avoid physical inventory counts and to eliminate the need for inventory tracking
Verified step by step guidance1
Understand the concept of consignment arrangements: In a consignment arrangement, the consignor (supplier) retains ownership of the inventory until it is sold by the consignee (retailer). This means the consignee does not record the inventory as an asset on their books.
Identify the primary reasons for using consignment arrangements: These arrangements are typically used to reduce financial risk for the retailer and allow the supplier to retain ownership of the goods until they are sold. This benefits both parties by minimizing upfront costs for the retailer and ensuring the supplier retains control over unsold inventory.
Analyze the incorrect options: For example, increasing the cost of goods sold and accelerating revenue recognition for the consignee are not valid reasons for consignment arrangements. Similarly, transferring legal title immediately or avoiding physical inventory counts are not consistent with the purpose of consignment arrangements.
Focus on the correct answer: The correct reasons are 'to allow suppliers to retain ownership until the goods are sold' and 'to reduce the financial risk for retailers.' These align with the fundamental principles of consignment arrangements.
Summarize the reasoning: Consignment arrangements are designed to benefit both the consignor and consignee by reducing financial risk for the retailer and ensuring the supplier retains ownership of unsold goods, which simplifies inventory management and financial accounting.
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