Question

Slater & Sons Corp manufactures electronic components for use in many consumer products. Their raw materials are purchased literally from all over the world. Depending on the country involved, purchase terms vary widely. Some suppliers, for example, require full prepayment, while others are content to receive payment within six months of receipt of the goods. Because of this situation, Slater never closes its books until at least ten days after month end. In this way, it can sort out ownership of goods in transit, and document which goods were received by month end, and which were not. Drew Bolton, a new accountant, was asked to record about $50,000 in inventory as having been received before month end. He argued that the shipping documents clearly showed that the goods were actually received on the 8th of the current month. His boss, busy with month-end reports, curtly tells Drew to check the shipping terms. He did so, and found the notation "FOB (free on board) shipper's dock" on the document. He hadn't seen that particular notation before, but he reasoned that if the selling company considered it shipped when it reached their dock, Slater should consider it received when it reached their dock. Drew did not record the sale until after month end. Questions: 1. Why are accountants concerned with the timing in the recording of purchases? 2. Do you think that Drew made the correct decision? Why or why not? 3. Since the books are closed, as Drew's boss, how would you follow up with this situation?

Answer 1

Answer to Question 1

Accountants are concerned with timing because they seek to make sure that sales are recorded in the proper period so that revenues and expenses are properly matched; to make sure that goods recorded as owned by the company actually are owned as of the last date of the period; and to make certain that sales recorded have been actually completed.

Answer to Question 2

Yes Drew was correct in doing so as the risk and liability is transferred only on receipt of goods on the dock of Slater. Accordingly, purchase should be recorded only at the time of receipt of goods on the dock of Slater.

Answer to Question 3

If the books have been closed, then in the financial statements a note to that effect should be disclosed so that the readers of financial statements get aware of the situation that the purchases have been not recorded properly.