A company uses a periodic inventory system. At the end of 2013 a purchase on credit of $5,000 was not recorded. Also, it was incorrectly excluded from the 2013 ending inventory. What effect, will these errors have on the 2013 financial statements of the company if they are undetected?
A) Pre-tax income will be overstated $5,000 and assets and liabilities each will be understated.
B) Pre-tax income will be correct, but liabilities and assets each will be understated by $5,000.
C) Pre-tax income and liabilities will be understated $5,000 each.
D) Pre-tax income, assets, and liabilities will be overstated $5,000 each.
E) Pre-tax income, assets and liabilities each will be understated.

Question

Quizplus · Accepted Answer

Since the purchase was not recorded, it means that both the inventory (an asset) and accounts payable (a liability) were not increased by $5,000. However, because the inventory was also excluded from the ending inventory count, the cost of goods sold (COGS) was not increased by this amount, leaving the pre-tax income unaffected.

A Company Uses a Periodic Inventory System