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PostPosted: Wed Apr 07, 2010 1:53 pm 
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I can find numerous examples on the Internet for how the Consignor should account for consignments, but there is very little on how a Consignee handles certain aspects.

I understand that consigned goods are owned by the Consignor. As the Consignee, I have no intention of showing these goods in my Inventory value. We simply have a ledger to keep track of the goods on hand. The question I have has to do with the Freight associated with shipping the goods from the Consignor to me, the Consignee. According to our agreement, the Freight cost is incurred by me, the Consignee (Most examples on the Internet show this cost born by the Consignor!). I have a disagreement with a colleague as to how we should be handling this "Freight-In".

My opinion (and the easier solution in my mind) is that we should simply expense the inbound Freight at the time that it is incurred. So, when the items are brought in (mind you there has been no sale of the goods at this point), we just debit freight expense and credit cash. Our agreement does not include a "commission", but rather a purchase price that is paid by us to the Consignor once the goods are sold. So, while the goods are in our possession, we show the goods on our ledger at that purchase price. Then when the goods are sold to our customer, we can record a debit to Cost of Goods Sold and a credit to accounts payable at that same "purchase price" to record the liability for the payment to the Consignor.

My colleague agrees with me that we should not include the items on our books in our Inventory. But, she wants to essentially allocate the inbound Freight, much like you would do with regular Inventory. Of course, there is no actual inventory on our books for these goods, so she wants to adjust the ledger that we are keeping to include an amount for the Freight. We would still have to pay the Freight bill when the charges are incurred since that expense is being paid separately to a third party. this would be charged to freight expense. But, then when the consigned goods are sold, she essentially wants to record a debit to Cost of Goods Sold at the higher price, inclusive of Freight. Since the Consignor is only owed the agreed upon purchase price (remember, the freight was paid to the freight company!), there would be a credit to Accounts Payable for the agreed upon price. But, since the transaction does not balance now, she wants to credit Freight for an amount equal to the freight that is now allocated and included in the Cost of Goods Sold. This essentially results in a reclass of the previously recorded Freight expense and shifts it to Cost of Goods Sold.

Am I crazy here, or is she freakin nuts!

One, I don't want to have to try and allocate these freight amounts and keep track of them in our ledger. Two, it just seems that there is a major violation of accounting principles here. Or, at the very least, it seems to me that the allocation of the freight is just unnecessary.

Is it reasonable to do what she is doing, in attempting to "reclass" what has been previously recorded as an expense and shifting these expenses to Cost Of Goods Sold? I think she might be worried about showing a correct "profit" for the sales of these items, so she wants the COGS to include the inbound freight.

Any opinions would be appreciated and if you can reference any specific GAAP that would be great.

Some added info, I don't know if it matters, but some of these items can be in our possession for a year or more. And some of the items are never sold and are returned to the Consignor.

Thanks


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PostPosted: Thu Apr 08, 2010 4:43 am 
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My reasoning says that the cost of acquiring goods for sale, whether purchased or on consignment, should be assigned to inventory. However, that would also include purchasing dept. expenses, storage costs, etc. But, such costs are not included in inventory because of the practical difficulties in allocating such costs. The same is true with your situation. The practical difficulties of allocation are simply unreasonable. Also, with consigned goods, sometimes they are shipped back to the consignor without ever being sold. To capitalize such costs would be totally inappropriate in my view. I say these are freight expenses appropriately classified under the category of "selling expenses" as a period cost. I see no support whatsoever for capitalizing freight costs of consigned goods in the accounting literature I have researched.


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PostPosted: Thu Apr 15, 2010 12:54 pm 
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This is strictly concerning inventory, but I don't see why it couldn't be done for consignment orders also.

from: [url]http://gaap-standard-accounting-practices.suite101.com/article.cfm/inventory-or-stock-valuation
[/url]

Inventory Valuation Methodology
Inventory should be valued at the lower of cost or net realisable value. Cost is defined as the purchase price plus the costs of bringing the products to their current location and condition. This means that transport and freight costs should be in built in the cost of the product. There are various methods of arriving at the cost of the product and these methods are discussed in the section below.

The net realisable value is the estimated selling price of the product in the ordinary course of the business minus the estimated costs of completing the sale and the estimated unavoidable costs that will be incurred to make the sale.

Beside subjectivity involved in estimating the future costs, net realisable value is straight forward therefore the article will now focus on how the cost of inventory is determined.



Read more at Suite101: Inventory Or Stock Valuation: How to Value Inventory http://gaap-standard-accounting-practic ... z0lCT23cWE


That being said, the simplest way to do it is to record your freight costs in a COGS account instead of an expense account. For example, under COGS you have the following accounts:
5000 - Product Costs
5001 - Freight

I have a company now that does that with their freight, even separates out UPS, Fedex, and Other shipping methods by assigning them to all different GL accounts.

That's far easier than allocating costs to each particular piece, and will also accomplish what your partner is trying to do - which is reflect the complete cost of the item.


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PostPosted: Thu Apr 15, 2010 3:55 pm 
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I respect your opinion, rsearcy, and maybe you are right. However, until consigned goods are sold the freight would have to be capitalized as part of inventory, not cost of goods sold since the goods haven't been sold yet. To include inventoriable costs in cost of good sold before a sale would over state expenses. In addition, consigned goods are not the inventory of the consignee. Therefore, I see no justification for classifying freight costs paid by the consignee as inventory either.Since this is an expense, whether the items are sold or not, I still think classifying these costs as period costs is more appropriate. I suspect the link you provided speaks nothing of consigned goods, only goods purchased and under the ownership of the company that bought them. That is not the case with consigned goods. Just my opinion. However, I think there are valid arguments for both sides. So good post rsearcy.


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PostPosted: Tue Apr 20, 2010 5:27 am 
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Here is another perspective:
I tend to agree more with your colleague in theory. These freight costs are actually costs advanced on the deal until it is completed. Thus, the freight charges should be a Prepaid Expense listed under Current Assets on the balance sheet until the deal is either completed or the merchandise returned to consignor. If you retain the merchandise, then the Freight would be your cost. Then when deal is either closed or returned to customer, Dr Freight and Cr Prepaid Expense to remove the freight-in on the deal. Do not agree that this is a period cost because GAAP requires a matching of revenue and expenses, in particular, if you stock up on seasonal merchandise in advance of the sales period. For instance, if we are talking about lawn mowers, then you would not expense freight in February when you stock them , but in April and May when you sell them. If it is not practical to track individual items, I believe some sort of average based on weight or volume or distance moved would probably be a reasonable way to expense the Prepaid Expense described above.
I am certain that IRS would require you to handle this in the manner I have described. As far as similarity to other industries, when a cash basis attorney pays a filing fee in advance of receiving fee from client, it is coded to a Current Asset Account 'Costs Advanced to Clients.' Then expensed when payment is received or written off.
Do not have any idea of sales volume of your organization or accounting method used or if this is material or even the type of merchandise you normally stock. Also, I hope you are not a Bonded Warehouse.
Good luck.


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PostPosted: Thu Apr 22, 2010 4:34 pm 
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I concur with wfclyon. His methodology makes the most sense to me. You want to match the expense with the reveneue, when and if generated.


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PostPosted: Mon May 03, 2010 10:18 am 
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I concur with wfclyon also. I did not think about that aspect when I posted my original response.


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PostPosted: Sun Jun 20, 2010 9:59 am 
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One item that is not mentioned but is very critical is related to the insurance coverage of the consignment stock. We know that the legal ownership stays with the lessor, but I have seen some consignment agreements that shift the responsability for the insurnace coverage of the stock over to the consignee.


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PostPosted: Sun Jun 20, 2010 10:46 am 
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wrei:
How does insurance coverage change the accounting for the consignment, which is the forum topic. I suppose that in the unlikely event the company obtains insurance for a single unique shipment, it might have to be accounted for differently, wouldn't think so. Insurance is a period cost and the premium is calculated based upon the insurance company's analysis of the risk, which I assume remains steady throughout the year. I am not attempting to defend the answers offered by any of the contributors, but is there something we are all missing?


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