Determining the Correct Inventory Balance for Seemore Lens Company (SLC)

Seemore Lens Company (SLC) is a business specializing in contact lenses, sold under FOB (Free on Board) terms. Proper inventory management is crucial for companies like SLC to maintain accurate records and financial reporting. This guide explores key steps for determining the correct inventory balance at SLC, given its FOB selling terms.

Understanding FOB Shipping and Inventory Balance

FOB terms, or "Free on Board," dictate when ownership of goods transfers from the seller to the buyer. Under FOB Shipping Point, ownership transfers when goods leave the seller’s location, whereas FOB Destination means ownership transfers when goods reach the buyer’s location. Understanding these terms is essential for determining which inventory belongs to SLC at a given time.

Steps to Determine the Correct Inventory Balance

Follow these steps to accurately assess the inventory balance for SLC:

1. Identify the FOB Terms on Each Transaction

Review each sales agreement to determine if the terms are FOB Shipping Point or FOB Destination. This information will define when ownership and responsibility for the inventory transfers to the customer, impacting what should be counted in SLC`s inventory.

2. Include Inventory in Transit (if FOB Destination)

If goods are sold FOB Destination and are still in transit, they should be included in SLC’s ending inventory balance until they reach the customer’s location. This is because SLC retains ownership and the associated inventory costs until delivery is completed.

3. Exclude Inventory Shipped (if FOB Shipping Point)

For transactions under FOB Shipping Point, inventory shipped to customers should be excluded from SLC’s ending inventory once it leaves SLC’s facilities. Ownership transfers at the point of shipment, meaning these goods no longer count as part of SLC’s assets.

4. Verify Inventory with Physical Counts

Regular physical inventory counts should be conducted to ensure records align with actual inventory. Any discrepancies between the recorded and physical counts should be investigated and adjusted accordingly, taking into account any goods in transit under FOB Destination terms.

5. Adjust for Returns and Damaged Goods

If there are returns or damaged goods, SLC should adjust its inventory balance to reflect these items. Returns should be added back to inventory once they are confirmed, while damaged goods should be accounted for based on company policy, potentially as a write-down if they’re unsellable.

Impact of Accurate Inventory Balancing on Financials

Correctly calculating inventory balances affects both the income statement and the balance sheet. An accurate inventory count ensures that the cost of goods sold (COGS) is reported correctly, which impacts gross profit and net income. For SLC, understanding inventory under FOB terms is critical to accurate financial reporting and informed decision-making.

Conclusion

Seemore Lens Company must carefully analyze FOB terms on each sale to determine the correct inventory balance. By following the steps outlined, including adjusting for FOB Shipping and Destination terms and regularly performing physical counts, SLC can maintain an accurate inventory that reflects its financial position accurately.