University - Year 2

Accounting Theories

INVENTORIES ARE ASSETS THAT ARE:

a. Held for sale in the ordinary course of business (Finished Goods);
b. In the process of production for such sale (Work In Process); or
c. In the form of materials or supplies to be consumed in the production process or in the rendering of
services (Raw materials and manufacturing supplies)

RECOGNITION
 Inventories are recognized when they meet the definition of inventory and they qualify for
recognition as assets, such as when legal title is obtained by the buyer from the seller.
 Legal title normally passes when possession over of the goods is transferred.
 However, there may be cases where the transfer of control (ownership) does not coincide with the
transfer of physical possession.

GOODS IN TRANSIT
1. FOB Shipping Point
 ownership over the goods is transferred upon shipment
 therefore, the goods in transit form part of the buyer’s inventories
2. FOB Destination
 ownership over the goods is transferred only when the goods are received by the buyer
 therefore, the goods in transit still form part of the seller’s inventories