A company using the periodic inventory method correctly recorded a December 29 purchase of merchandise, but the merchandise was not included in the physical inventory count on December 31 (end of the accounting period). The error caused an:
A) understatement of inventory, purchases, and accounts payable.
B) overstatement of both income and assets by the same amount.
C) understatement of both income and assets by the same amount.
D) overstatement of inventory, purchases, and accounts payable.

Question

Quizplus · Accepted Answer

Since the merchandise was not included in the physical inventory count, the inventory balance would be understated by the cost of the merchandise. This understatement of inventory would also result in an understatement of the cost of goods sold and an overstatement of gross profit, which in turn would result in an understatement of net income. Therefore, both income and assets would be understated by the same amount. Purchases and accounts payable would not be affected by this error.

A Company Using the Periodic Inventory Method Correctly Recorded a December