Merchandise dispatched on a 'sale or return' basis ought to:
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Answer: A. Be included in the stock
Explanation
Goods sent on sale or return remain company property until the customer formally accepts them. Unaccepted merchandise dispatched on approval must therefore be included in closing stock valuations. Failing to include these items in stock would improperly understate inventory and net income. Sale or return transactions involve transferring possession without transferring legal ownership immediately. Inventory must include all goods where the reporting entity retains significant risks of ownership. Revenue cannot be recognized on these goods until the customer indicates formal acceptance.
Retailers often send goods to customers for evaluation before finalizing purchase transactions. Auditors carefully inspect year-end dispatch records to ensure proper inventory cut-off procedures. Incorrect treatment of consignment or approval stock distorts the reported working capital position. Excluding these items from stock would incorrectly assume a completed sale has occurred. Auditors must check all inventory components, including goods out on approval or consignment. Option d is incorrect because a valid accounting treatment exists under standard rules.
- Subject
- Accounting and Finance
- Category
- Auditing
- Topic
- —
- Difficulty
- medium
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