If a company uses the periodic inventory system, what is the impact on net income of including goods in transit F.o.b. shipping point in purchases, but not ending inventory?
A) Overstate net income.
B) Understate net income.
C) No effect on net income.
D) Not sufficient information to determine effect on net income.

Question

Quizplus · Accepted Answer

When using the periodic inventory system, purchases are recorded when they are received, which means that goods in transit F.o.b. shipping point are included in purchases. However, because goods in transit are not yet received at the end of the period, they should not be included in ending inventory. Therefore, including goods in transit in purchases but not in ending inventory will result in an understatement of the ending inventory and an overstatement of the cost of goods sold. This, in turn, will result in an understatement of net income.

If a Company Uses the Periodic Inventory System, What Is