Merchandize inventory is the value of goods acquired by a distributor, retailer, or a wholesaler with the intention of reselling it to gain profit. The costs of the goods appear as an expense in the income statement if they are sold within an accounting period. However, failure to sell the goods within the accounting period will lead to recording them as current assets goods in the balance sheet. This will prevail until the goods are sold. Special attention is paid to certain inventory items. These include goods in transit, consigned goods and damaged or obsolete goods.
Goods in transit are reflected in the buyer’s inventory upon accepting ownership from the supplier. This will be shown by the shipping terms. If the buyer is the one to pay for the freight charges, ownership shifts to him/her the moment the goods are loaded on vehicles at the seller’s warehouse. However, if the seller is the one meeting these charges, then ownership changes the moment the goods arrive at the intended destination. This is known as Free on Board (FOB) destination, while the one involving the buyer paying for the transportation charges is known as FOB shipping point.
Consigned goods are the goods that the owner facilitates the shipment of to another party. The owner is known as consignor, while the recipient is known as consignee. Once delivery of the goods is done, the consignee sells them on behalf of the owner. The ownership of the goods still remains under consignor who records them in his inventory.
Damaged or obsolete goods cannot be sold and hence are not included in the inventory. However, provision is made to sell the goods at a lower price. If this is done, inclusion of the goods in the inventory is done through estimation of the net realizable value. This involves the price for selling and subtracting the cost of making the sale.