Enhance your sales growth revenue for inventory with airSlate SignNow

How to create outlook signature

hello and welcome to the session in which we would look at consignment arrangement as part of the revenue recognition process in a consignment arrangement we have two parties we have a consignor and a consignee for the purpose of this illustration we're going to assume that pepsico is the consignor and walmart is the consignee who is the consignor it's the party that transfer the goods not the title to the consigning simply put pepsico will transfer physically transfer their product and replace their product in walmart store for resale although they place their product in walmart store where walmart has physical procession the titles never did not change pepsico still have the title for its own product so the consignor pepsico will retain its title pepsico places the goods for resale simply put all what's happening here you can look at it as an arrangement to rent the shelf so all what walmart providing is the space giving pepsico the space shelves to place their product once goods are sold walmart will submit the proceeds from the sale minus a commission as a revenue for walmart so nothing will happen really no sale will take place until walmart sells the product to a third party to a customer walmart will take a small commission and will submit the proceeds remaining to pepsico so pepsico will only recognize the revenue when the goods are sold to a third party and what we mean by third party here is someone other than walmart because well walmart did not buy the product from pepsico because if the products are not sold simply put walmart will return the product to pepsico and there's no sale for pepsico so pepsico will have to wait until a customer walks into walmart buys the buys the product and walks out now what is the cons who's the consignee well we said the khan signee is walmart the consignee accept the transfer of the goods but not the title although they have they possess the physical inventory that inventory cannot be counted as part of walmart's inventory so simply put when walmart counts their inventory they cannot count pepsico product as part of their inventory and walmart's will make a commission which is this is when they recognize the revenue when they make the sale and when they make the sale also pepsico will make the sale as well so in a sense walmart will take title for a few seconds when they when the person walk with the product give it to the cashier the cashier scan it in that split second walmart takes title sells it then give the proceeds back to pepsico it doesn't happen automatically i mean it does it could happen automatically in a software system but we're not going to assume it's going to happen automatically actually we're going to look at an example to see how this process work by using journal entries but before we look at journal entries and an example i would like to remind you whether you are a student or a cpa candidate to take a look at my website farhatlectures.com i don't replace your cpa review course i don't replace your accounting courses my motto is saving accounting students and cpa candidate one at a time by providing new resources lectures multiple choice true false questions that's going to help you understand the material better and do better on your exam this is a list a partial list of my accounting courses my cpa material is aligned with your wrecker roger gleam wiley miles or any other cpa review course i give you access to 1 500. previously aicpa released questions with detailed solution if you have not connected with me on linkedin please do so take a look at my linkedin recommendation like this recording share it with other it helps me tremendously connect with me on instagram facebook twitter reddit and i just started a cpa exam support group on groupme please join us let's take a look at this example to illustrate sales on consignment or consignment arrangement let's assume pepsico shipped product cost costing 360 000 on consignment to walmart well that's what happened first pepsico pays 20 000 of freight sales so they pay 20 000 to get the product to walmart walmart from their part they're gonna pay five thousand dollar in advertising costs to promote pepsico product however the advertisement cost will be reimbursed by pepsico by the end of the period walmart sold two-thirds of the consigned merchandise two-thirds of 360 000 for 320 000 in cash then walmart notifies pepsico of the sales repair 10 commission and sends the cash proceeds to pepsico so let's take a look at the journal entries step by step from the shipment of goods from pepsico to walmart when we ship the goods pepsico will debit an account called inventory consignment and they will credit finished goods they're basically both inventory all what they're indicating here that the inventory left pepsico warehouse and now it's part of our inventory of pepsico inventory but it's on consignment in walmart what would all more what would walmart do under those circumstances basically no entry what will what will walmart do is basically make a note a memo knowing that you know make sure don't count pepsico inventory as part of our inventory then pepsico paid 20 000 for freight cost remember freight in it's part of the inventory cost therefore walmart sorry pepsico will debit inventory we're going to make a 30 000. um pepsico pay 30 000 we're going to debit inventory 30 000 credit cash 30 thousand what will walmart do practically nothing yeah they have nothing to do with anything now payment of advertisement costs now walmart did incur five thousand dollars so what they did when they send their weekly uh offers they just had a special offer for pepsico and they had to pay five thousand dollars for that advertisement that's fine and that five thousand dollar pepsico will reimburse them for it simply put pepsico told them you have five thousand dollar budget advertise as you see fit and will reimburse you what will pepsico do under those circumstances for the five thousand dollar nothing yet on the other hand walmart paid the five thousand they will credit cash and they will debit a receivable from pepsico why because pepsico is going to reimburse them for that money now the sale took place now the customers bought the product well as of right now there's no entry for pepsico for walmart they will debit cash they sold them for 320 they will debit cash 320 and they will debit cash and they will credit payable to pepsico 320. so this money is belongs to pepsico as far as walmart is concerned they're going to take a cut of it but part of it the majority will be for walmart for pepsico now we're going to see how much money we are going we're going to be sending to pepsico pepsico okay so we received 320 000. here's what's going to happen first we're gonna keep we means walmart will keep five thousand dollar for the advertisement then they will keep ten percent of three hundred and twenty thousand times ten percent they will keep another 32 000 as a commission cost so what's going to happen is this so we're going to be let's take a look at the calculator and so 320 that's how much they received in cash minus 5 000 they're going to be reimbursed minus 32 000 is basically their commission they're gonna give they're gonna send to pepsico 283 000. so pepsico will do the following they will debit cash 283 000 they will debit advertise and expense which is that's when they expense it they will debit commission expense because they have to pay commission 2 to walmart 32 000 and they will credit revenue the total revenue is 320. so although the total revenue is 320. really they had they had two additional expenses the 5000 and the 32 000. so now the net net sales 283 000 although they sold 320 but the net sales for now is 283. walmart when they submit the 283 000 i showed you how to complete this when they submit this money they will debit this payable to get rid of this payable they will debit payable to pepsico because now they submitted the money they will cut they will credit the 5 000 of receivable because pepsico now told them to keep the money so they will credit this receivable to remove it and they will credit commission revenue to recognize 32 000 of commission revenue so this is the entry that walmart will make so at this point walmart would record so notice what's happening this revenue for walmart the 32 000 is an expense for pepsico and the 5 000 that that that walmart pay on behalf of pepsico it's recorded as 5000 expense on on on pepsico books so simply put walmart made 32 000 which is 10 percent now now we have to also record cost of goods sold for pepsico because pepsico they only sold what not only sold they sold two-thirds uh two-thirds of their goods they still have one-third simply put we have to remove two-thirds of two-thirds of what so we have to remove two-thirds of 360 000 times two-third is 240 then one then pepsico also incurred 30 000 in in in freight in two thirds of 30 000 is 20 000. hopefully we know this so our cost of goods sold is 260 and now i remember why i changed this number from 20 to 30 because we assumed we sold um we sold two thirds so it's easier to do two-thirds for thirty thousand okay so now with debit cost of goods sold to 60 credit inventory consignment to reduce our inventory consignment account by 260. now we can say well after we deduct the cost of goods sold so let's make costs of goods sold in a different color 260 000. all in all pepsico made gross profit gross profit of 23 000 on this on this arrangement made 23 000 if we take 23 000 divided by twenty it's approximately made approximately seven percent net profit seven percent well we can say we can call it net profit assuming we have no other no other operating expenses okay so this is basically the arrangement and and walmart doesn't do anything for adjusting inventory and cost of goods sold because it's not your inventory so all in all this is how you this those are the journal entries that you are expected to know for arrangement goods on consignment what should you do now go to forehead lectures.com register subscribe work mcqs and look at other resources to reinforce those concepts invest in your accounting career invest in your cpa education don't shortchange yourself it's worth it yes it is difficult it's challenging but at the end of the day it's gonna pay you it's gonna pay off good luck study hard and of course stay safe