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I need help identifying the preliminary accounting issues or problems with this case. The case information and facts are below, what problems should be investigated?
I need help identifying the preliminary accounting issues or problems with this case. The case information and facts are below, what problems should be investigated?
Grocery Inc. (Grocery or the Company), an SEC registrant, is a wholesale grocery distributor and retailer in the United States. One of the Company's core businesses is distributing grocery products to restaurants. Fresh Express Inc. (FEI) operates a chain of restaurants throughout the world and contracts with manufacturers to obtain grocery and related products for the chain. Manufacturers either deliver the products to FEI's restaurants directly or, more commonly, contract with distributors such as Grocery to deliver the products. The following steps summarize the flow of transactions when a manufacturer contracts with distributors (e.g., Grocery) to deliver products to restaurants designated by FEI: 1. The manufacturer provides FEI with the details of each product to be sold to the restaurants, and FEI approves the products on the basis of the specifications outlined by the manufacturer. Once the products are approved, FEI enters into a master contract with the manufacturer to supply the products (the "Master Contract"). 2. The manufacturer selects a distributor (e.g., Grocery) to be named as the official representative to FEI. The manufacturer and Grocery enter into a distribution contract (the "Distribution Contract"), which typically specifies (a) the restaurants that the Company may supply to on behalf of the manufacturer, (b) the manufacturer's products that have been approved by FEI to be supplied, (c) service and delivery requirements, and (d) payment terms. 3. Grocery issues a purchase order to the manufacturer for products. The products are then delivered to the Company and held in the Company's distribution warehouses. Title of the products transfers from the manufacturer to the Company in accordance with the shipping terms specified in the Distribution Contract. The Company is required to keep inventory on hand, regardless of whether FEI has placed an order for the products. 4. The Company pays the manufacturer for the inventory on the basis of the published distributor list price at the time of purchase ("Distributor Product Cost"). 5. As restaurants need to be restocked, FEI identifies the manufacturer that sells the necessary products, determines which distributor is the manufacturer's official representative for a particular restaurant, and then issues a purchase order with that distributor (e.g., Grocery) under the terms of FEI's Master Contract with the manufacturer. 6. The Company, acting as the distributor, locates the products ordered by FEI in its existing inventory and ships the products to the restaurants designated by FEI. Generally, title of the products transfers directly from the Company to FEI (i.e., title of the products does not revert back to the manufacturer).
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