Question

Question One

1. Distinguish between FOB shipping point and FOB destination. Identify the freight terms that will result in a debit to Inventory by the purchaser and a debit to Freight-out by the seller
2. The income statement for a merchandising company presents five amounts not shown on a service company’s income statement. Identify and briefly explain the five unique amounts.

Answer 1

	FOB shipping point	FOB Destination
1.Ownership of goods	Title to goods passes to the buyer as soon as the goods are handed over to the carrier/transporter.	Title to goods passes to the buyer only on delivery at a place specified by him.
2.Freight,insurance,etc.	Are the responsibility of the buyer, as title to goods has changed,at the shipping dock.	Are the seller's responsibility, as goods are still his own.
3.Recordation	Seller should record sale & buyer should record inventory ,in his books of accounts	Goods are still in seller's inventory & buyer does not record anything, till it he takes delivery of goods.
the freight terms that will result
In a debit to Inventory by the purchaser	FOB,Shipping Point	Buyer records purchase as title goods has passed on to him , at the shipping point.
In a debit to Freight-out by the seller	FOB, Destination point	Seller records expense , as goods are still in his books.

Income statement for a merchandising company

Contain some unique items that are not found on the income statement of a service company

They are:

Sales revenues-- of products sold -- they manufacture & sell products , rather than offering services, for which the latter receive fees revenues as income.

Cost of goods sold--- contains various items like cost of materials, labor and plant overheads incurred to help production of goods.

Gross profit margin---- it is the manufacturing margin , before incurring any administartive expense

Selling expense---- expenses incurred on sales promotion activities like advertising the product,sales staff salaries and commissions, etc.

Depreciation expense--- on plant, machinery & equipment that are used in production of goods