The accountant for Frieda Company did not record a purchase of merchandise on credit or include the items in the ending inventory.Assuming a periodic inventory system, the effect of these omissions on assets, liabilities, and retained earnings would be $\begin{array}{lll}&\text {Asssets }&\text { Liabilities}&\text { Retained Earming}\\hline
I.&\text { Understate } & \text { Understate } & \text { Understate } \
II.&\text { Understate } & \text { Understate } & \text { No effect } \
III.&\text { No effect } & \text { Understate } & \text { No effect } \
IV.&\text { Underetate } & \text { No effect } & \text { ITnderctate }
\end{array}$

Question

Quizplus · Accepted Answer

Not recording a purchase of merchandise on credit would understate both assets (inventory) and liabilities (accounts payable). However, since the ending inventory is also understated, the cost of goods sold would be understated, leading to an overstatement of net income and retained earnings. Therefore, there's no effect on retained earnings due to the offsetting errors.

The Accountant for Frieda Company Did Not Record a Purchase