Inventory absorbs freight-in; discounts reduce cost, and never apply to freight

What inventory costs

ASPE s.3031 says the cost of purchased inventory is the purchase price plus duties, taxes that are not recoverable, freight and handling to bring the goods to their present location, less trade discounts, rebates and similar. Under a perpetual system every one of those pieces lands in the one account, Inventory, so that when the item sells, the cost that moves to Cost of Goods Sold is the whole cost of getting it onto the shelf.

Worked example — 200 headlamps

On 3 April Bramble Lane Outfitters Ltd. buys 200 headlamps at $18 from a Montréal supplier on account, terms 2/10, n/30, shipped FOB shipping point.

Apr 3   Inventory                          3,600
            Accounts Payable                       3,600

Not Purchases — that account exists only in a periodic system (L8.4). FOB shipping point means ownership passed to Bramble Lane at the supplier's dock, so the goods are Bramble Lane's while they are on the truck, and so is the freight. On 5 April the carrier is paid 150:

Apr 5   Inventory                            150
            Cash                                     150

Freight-in is a cost of getting inventory, so it is part of inventory's cost. It is not Delivery Expense — that is freight-out, the cost of shipping goods to a customer, an operating expense. On 8 April 20 headlamps are defective and go back to the supplier, who issues a credit:

Apr 8   Accounts Payable                     360
            Inventory                                360

The return reduces what is owed and takes the 20 units' cost (20 × 18) out of Inventory. On 12 April — day 9 of the 10-day window — Bramble Lane pays. The invoice is now 3,600 − 360 = 3,240, and the 2 % discount applies to that: 3,240 × 2 % = 64.80, so the cash is 3,175.20.

Apr 12  Accounts Payable                   3,240
            Inventory                                 64.80
            Cash                                   3,175.20

The discount reduces the cost of the inventory — the headlamps cost less than the invoice said — so it is credited to Inventory, not to a revenue or a Purchase Discounts account. And it is 2 % of 3,240, never of 3,750: the freight was paid to a carrier, not to the supplier, and no supplier gives a discount on a cost it did not charge.

What the 180 headlamps cost

$$3,600+150-360-64.80=3,325.20\Rightarrow \frac{3,325.20}{180}=18.4733\text{ per unit}$$

That 18.4733 — not 18 — is the cost that moves to Cost of Goods Sold when a headlamp sells, and the figure the cost formulas of L8.5 and L8.6 will carry. A case that gives you an invoice price and a freight bill is testing whether you add the freight in and leave the discount off it.

The FOB rule, both directions

FOB shipping point: title passes when the goods leave the seller — the buyer owns them in transit and pays the freight (into Inventory). FOB destination: title passes on arrival — the seller owns them in transit and pays the freight (as Delivery Expense). The same rule decides whose count the goods belong in on 31 December (L8.3).