ACCA Strategic Business Reporting (SBR) Practice Exam

What indicates that a dealer has no unconditional obligation to pay for the product in a consignment arrangement?

1. The entity can require the return of the product

2. The product has a fixed price

3. The dealer pre-pays for the product

4. The entity provides warranties

The correct answer is: The entity can require the return of the product

In a consignment arrangement, the key indicator that a dealer has no unconditional obligation to pay for the product lies in the ability of the entity to require the return of the product. This characteristic is fundamental to consignment arrangements, where ownership remains with the consignor (the supplier) until the goods are sold. When the entity can request the return of unsold products, it highlights that the dealer does not take on the full risk associated with the inventory. Instead, the consignor retains that risk, which is a defining feature of consignment sales. This arrangement allows the dealer to sell the products without a firm commitment to purchase them outright, reflecting the contingent nature of their obligation. The other aspects mentioned in the other options do not indicate a lack of unconditional obligation. A fixed price does not influence the payment obligation, pre-payment signifies a firm commitment to pay, and providing warranties does not relate directly to the payment obligations but rather to assurances regarding the product’s performance. Therefore, the ability to require the return of the product is the clearest indication of the dealer's lack of obligation to pay unconditionally in a consignment arrangement.