The location of an inventory could have a heavy impact on its value, just as it can with machinery & equipment. If the inventory is at several locations, it may be that disposal would require consolidation of all locations to achieve a reasonable value. The expense, of course, would have to be measured to ensure these expenses do not cause the net value to be less than it would have been had the goods not been relocated. However, this does not mean it is necessary for a company with several locations to consolidate its inventory in order to hold a sale. It may be that each location would achieve a better return if sold separately.
In-transit inventories are another area the appraiser should examine, since these goods are often excluded from a borrowing base. This is because there could be unresolved ownership issues. Two areas where the issue of inventory ownership arises are:
Goods In-Transit:
Goods In-Transit between the buyer and seller belong to the party that possesses legal ownership (title) to the goods. Legal ownership, in turn, is dependent on freight terms, that is, F.O.B. Shipping Point and F.O.B. Destination. F.O.B. Shipping Point indicates the location where the seller's responsibility for shipping ceases. As a logical extension, the F.O.B. Shipping Point also indicates where legal title to the goods is transferred from the seller to the buyer. For example, under F.O.B. Shipping Point title transfers to the purchaser when the goods are shipped; while under F.O.B. Destination, title passes when the goods arrive at their destination, e.g., the buyer's warehouse.
When title passes, the seller should record a sale and the buyer should record a purchase. Accordingly, inventories should be respectively reduced and increased at this time, although the goods may still be on-hand or in-transit. To illustrate, suppose a company buys $10,000 of merchandise, F.O.B. Shipping Point, on December 29. The goods are shipped on December 30, and are in-transit at the end of the purchaser's accounting year. Nevertheless, the purchaser should enter a purchase in their records, and include the goods in the ending inventory count because title has passed.
To simplify record keeping during the year, many companies operate on a receipt and shipment basis. That is, purchases are recorded upon receipt regardless of the F.O.B. Shipping Point and sales are recorded upon shipment. If in-transit shipments are significant, firms should examine their records and make appropriate account adjustments so that all merchandise owned is properly reflected in the ending inventory balance. An incorrect accounting for sales and purchases will influence not only the inventory, but also the cost of goods sold, net income, owners' equity, accounts receivable, and accounts payable.
In addition, some in-transit inventories could be en-route from a foreign country, by which issues related to title and letters of credit may arise that are outside the domain of the appraiser's expertise. Goods in-transit could be items purchased internally by a U.S. based manufacturing facility from their foreign source parent company, or merchandise exchanging between a buyer and seller. Whatever the case, legal ownership of those goods depends upon the freight terms. Therefore, the established freight terms are important to the appraiser, since the assignment of value is as of a specific date. If ownership of the goods is transferred after the effective date of the appraisal, they could not be included in the value conclusion.
A company may also have goods on consignment, which is merchandise placed with a selling agent. However, ownership of this merchandise may still belong to the consignor. Therefore, disposition of this merchandise is important to the appraiser, since the goods that have not yet sold may need to be considered. In some cases, a company may also have inventory off-site being repaired. This inventory is often excluded from a borrowing base, not only because it requires repair, but also because it may be unrecoverable due to a mechanic’s lien or unpaid bills. Lastly, a company may have goods stored in a bonded warehouse. If so, a detailed accounting of that merchandise must be made, since it is usually included in the borrowing base by a lender.
Goods On-Consignment:
Some companies transfer merchandise to sales agents, to sell to potential buyers without transferring ownership. This process is known as consignment.
If the merchandise on consignment is sold, the agent receives a commission. If the merchandise is not sold, the goods are returned to the supplying company or consignor. Importantly, the consignor retains title to the transferred merchandise although the sales agent possesses the goods. Therefore, consigned goods are reported as part of the consignor's inventory until the time of sale. Goods on-consignment should not appear in the inventory account of the sales agent.
