Question

IDENTIFY and LIST the components and costs included in merchandise inventory. DEFINE the term goods in transit? please help

Answer 1

Components included in merchandise inventory are all costs incurred in bringing the material to their intended location till the material is ready for use. These costs typically include:

- Base purchase price of the material paid by buyer to seller

- All inward transportation costs, if incurred by the buyer

- Transit insurance from buyers place to sellers place

- Non refundable taxes

- In case of manufacturing entities, inventory will also include appropriate share of directly attributable overheads costs

These amounts have to be reduced by:

- Any discounts provided by the vendor

- Any subsequent price adjustments

- Any non refundable taxes have to be excluded

Goods in transit means that the goods are despatched by the seller, i.e. the seller has recorded outward movement of goods in his books, but the good have not reached the buyer as on the cut off period, and therefore, the buyer has not recorded a corresponding inward. Depending on the terms of the transaction, adjustment for good in transit is made. If property in goods passes to buyer on despatch by seller, the purchases will record goods in transit, as the goods are now his property and he has to pay the seller on despatch of goods. In case the property in goods still remains the sellers, the seller records a goods in transit as an asset instead of revenue as the seller is still the owner of goods and not entitled to money till the goods reach the buyer