Q1EI - Horngren'S Financial And Managerial Accounting

Question

Dobbs Wholesale Antiques makes all sales under terms of FOB shipping point. The company usually ships inventory to customers approximately one week after receiving the order. For orders received late in December, Kathy Dobbs, the owner, decides when to ship the goods. If profits are already at an acceptable level, Dobbs delays shipment until January. If profits for the current year are lagging behind expectations, Dobbs ships the goods during December. 

Requirements 

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.)

Step-by-Step Solution

Answer

1. The sale should be recorded in the books when goods leave the shipping place.
2. The decision of the owner is inappropriate. 

Step 1: Meaning of Ethics

In accounting, the term ethics refers to specific rules and guidelines that must be followed by each person/business associated with the accounting profession because the adherence to such ethics prevents the misuse of financial information.

Step 2: Recording of sales in the books

As per the given situation, Dobb is following the FOB policy under which sales should be recognized when goods leave the shipping dock of Dobb. 

Under this policy, the ownership of the goods is transferred to the buyer when such goods leave the seller's place. 

Step 3: Comment on the manner decided by the business

According to the second scenario, the manner of shipping the goods by Dobb seems unethical because the owner is shipping it according to the business's financial position. Such a practice may lead to manipulations in the books of accounts. 

Also, there must be transparency while performing business activities as it may be possible that the buyer requires the goods within a limited time for its business. 

Hence, Dobbs should not consider its books as the basis of shipping the goods to the customers; rather, it should follow the business's policies, such as shipping the goods after a week of receiving orders.