Question

Taha Company purchased $8,000 of inventory under terms FOB shipping point. Freight cost amounted to $200. The cost of inventory and freight were paid with cash. Which of the following shows how the recognition of this purchase, including freight costs if applicable, will affect Taha’s financial statements?

Answer 1

Answer:

An asset account will decrease by $8,200 (cash account) while another asset account will increase by $8,200 (merchandise inventory), so the total assets in the balance sheet will not change. Since the goods have not been sold yet, they will not affect the income statement.

Explanation:

When a sale is made free on board (FOB) shipping point, the buyer takes ownership of the goods at the seller's shipping dock and must pay the shipping costs.