Ethical Issue 5-1 Dobbs Wholesale Antiques makes all sales under terms of FOB sh

Question

Ethical Issue 5-1 Dobbs Wholesale Antiques makes all sales under terms of FOB shippi company usuall ships inventory to customers approximately one w week after receiv- ing the order. For orders received late in December, Kathy Dobbs when to ship the goods. If profits are already at an acceptable level, Dobbs shipment untilJanuary. If profits for the current year are lagging behind expectati Dobbs ships the goods during December. Requirements s, the owner, de decides 1. Under Dobbs's FOB policy, when should the company record a sale? 2. Do you approve or disapprove of Dobbs's manner of deciding when to ship goods to customers and record the sales revenue? If you approve, give your reason If you disapprove, identify a better way to decide when to ship goods. (There is no accounting rule against Dobbs's practice.)

Explanation / Answer

1. Sales under FOB shipping point refers to a situation where the title/ownership of goods transfers to the customer once the goods are shipped by the supplier and leave the shipping dock.Since, the title/ownership of goods have been transferred to the customer as soon as goods are shipped, the supplier has to record sales at that point.

Accordingly, in the current situation since Dobbs makes sales under terms of FOB Shipping Point, it should record sales as soon as goods are shipped.

2.No. Dobbs's manner of deciding when to ship goods to customer and record sales revenue under FOB shipment term is inappropriate and hence disapproved.

Under FOB shipment terms, since the ownership of goods transfers to the customer as soon as goods are shipped, supplier is bound to record sales his books. Also, if Dobbs defers the shipment that could result in increase in carrying cost of inventory and hence his current FOB policy is not recommended.

Dobbs (Supplier) should rather make sales under terms of FOB Destination wherein ownership of goods is retained by the supplier until the goods reach the buyer destination. Hence, revenue recognition can be deferred until the estimated date of delivery to the customer since it is not practical to verify actual delivery date for every customer delivery.Accordingly, Dobbs can ship the goods as soon as they are ready which would not lead to increase in his carrying cost of inventory and can also defer the record of sales till the expected time of delivery to the customer.

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