Goods in transit and purchase cut-off

Materials bought FOB origin belong in the buyer's inventory (with the matching payable) from loading, even while at sea; missing in-transit stock at year end understates both inventory and liabilities. This is a recurring, material year-end audit adjustment in LC-financed import supply chains, distorts working capital ratios and current ratio covenants, and understating both inventory and payables together can mask a genuine control gap in the purchase-to-pay cycle around period end.

Is there a supplier-by-supplier Incoterms matrix kept current as contracts are renegotiated, and is it applied to open shipments at each period end to determine control transfer? For FOB/CFR/CIF shipping-point terms, has in-transit stock already loaded but not yet received been included in inventory (with a matching payable), rather than omitted? Does the physical count reconciliation specifically capture in-transit quantities and match them to open LCs?

1. Build a supplier-by-supplier matrix of purchase Incoterms (FOB, CFR, CIF, EXW, DAP, etc.) that determines the point at which control and risks/rewards transfer to the buyer, and keep it current as contracts are renegotiated.
2. At period end, obtain a listing of all open purchase orders and shipments not yet received into the warehouse, with bill of lading/airway bill dates and shipping terms for each.
3. For each in-transit shipment, apply the Incoterm to determine whether control has already passed (e.g. FOB/CFR/CIF shipping point terms typically transfer control on loading at origin) and, if so, recognize the inventory and the corresponding payable even though goods have not been physically received.
4. Cross-reference in-transit items to open letters of credit and shipping documents to confirm existence, quantity and cost, avoiding both omission and double-counting with goods already received into stock.
5. Ensure the physical count/count reconciliation procedures explicitly capture in-transit quantities (via a separate in-transit listing) rather than relying solely on a warehouse count, since a warehouse-only count structurally excludes goods at sea or in customs.
6. Reconcile total purchases recognized for the period (goods received plus qualifying in-transit) against the payables ledger and open LC register to catch any residual cut-off gap before closing the books.

Basis: in-transit inventory is measured at cost, comprising the purchase price plus all costs directly attributable to bringing the goods to their present location and condition - freight, insurance, handling and import duties borne by the buyer under the applicable Incoterm - not at the eventual invoiced landed cost only after clearance. Included: goods for which control/risk has passed to the buyer per the shipping terms, valued using the exchange rate at the date of recognition (shipment/loading) for foreign-currency purchases. Excluded: goods where the supplier retains control/risk until a later point (e.g. DAP/DDP terms transferring control on arrival) should not yet be recognized as the buyer's inventory, even if an advance payment has been made (which would instead be a prepayment/deposit asset). Re-measurement trigger: reassess in-transit inventory for net realizable value at each reporting date consistent with the rest of inventory (e.g. if damaged in transit or overtaken by price declines), and reconcile/true-up estimated freight and duty accruals to actual invoiced amounts once received.

Reconciliation of period-end in-transit inventory to open letters of credit and shipping documents (bill of lading dates, Incoterms); disclosure of goods-in-transit as a separate line or note category within inventory if material, distinct from raw materials on hand; accounting policy note describing the point at which control/risk transfers for purchases (by Incoterm category) and how it is applied at cut-off; disclosure of the components of inventory cost for in-transit goods (purchase price, freight, insurance, and any import duties accrued but not yet paid).

• Recording purchases only when a goods receipt note is created at the warehouse, systematically excluding legitimately owned in-transit stock at period end
• performing the physical count of warehouse stock only, with no separate procedure to capture containers still at sea or held in customs bond
• double-counting goods after customs clearance because the in-transit entry was not reversed/reclassified when the goods receipt note was raised
• applying a blanket assumption (e.g. always recognizing on customs clearance) instead of checking the actual Incoterm per supplier/shipment, which can materially misstate cut-off in either direction
• omitting freight and insurance borne by the buyer from the in-transit inventory cost, understating inventory value.