Global Logistics
The basis of accounting for inventory is cost which includes the cash or fair value of consideration for exchanging for goods. This purchase commitment does not pass any legal title because the contract permits to manufacture unpainted golf cart by GCA. Therefore performance of the contract is not completed until the unpainted cart shipped or delivered to GL. Usually, it is incorrect to make financial entries for commitments for ordinary order of purchasing which have not been shipped by the seller. GL’s order is reasonably assumed a committed purchase order of unpainted cart for manufacturing into finished products. Therefore this purchase commitment is considered an executory and non-cancelable contract but neither party has performed or fulfilled their part of the contract. From the above analysis, the contract details should be disclosed in the notes of financial statement if the amounts are abnormal in relation to the entity’s normal business operations or financial position. In disclosure, GL should include the contract for the purchase of raw materials (unpainted carts) of the executed total contract amount ($350+$20*number of carts) for the specific purchase commitment and the market price of the unfinished carts or raw materials. The impact of the above transaction should decrease the net income; increase the liability and decreasing the retained earnings of the balances sheet.
This is an additional cost to determine cost of goods for the sale or ready for sale including the cost of painting the golf cart. The policy of the GL maintains the supply of stocks on hand for several week ensuring without shortage. Therefore GL should identify the cost of physical inventory parts that should be allocated with the finished inventory of the golf cart which is generally included in the balance sheet of the entity as inventory. The cost of labour to manufacture the components and paint the golf cart should be added to the finished product...