The accountant for the Iris Company did not record a purchase of merchandise on credit for the current year, but the merchandise was correctly included in the ending inventory.Assuming a periodic inventory system, how would assets, liabilities, and retained earnings be affected on the year-end balance sheet? $\begin{array}{lll}&\text {Asssets }&\text { Liabilities}&\text { Retained Earming}\\hline
I.&\text { No effect } & \text { Understated } & \text { Understated } \
II.&\text { Undlerstated } & \text { Understated } & \text { No effect } \
III.&\text { No effect } & \text { No effect } & \text { Overstated }\
IV.&\text { No effect } & \text { Understated } & \text { Overstated }\
\end{array}$

Question

The accountant for the Iris Company did not record a purchase of merchandise on credit for the current year, but the merchandise was correctly included in the ending inventory.Assuming a periodic inventory system, how would assets, liabilities, and retained earnings be affected on the year-end balance sheet? $\begin{array}{lll}&\text {Asssets }&\text { Liabilities}&\text { Retained Earming}\\hline
I.&\text { No effect } & \text { Understated } & \text { Understated } \
II.&\text { Undlerstated } & \text { Understated } & \text { No effect } \
III.&\text { No effect } & \text { No effect } & \text { Overstated }\
IV.&\text { No effect } & \text { Understated } &  \text { Overstated }\
\end{array}$

Quizplus · Accepted Answer

Since the purchase was not recorded, liabilities are understated because the credit purchase was not added to accounts payable. However, because the merchandise was included in the ending inventory, assets (inventory) are correctly stated, not affected by the omission of the purchase record. Retained earnings are overstated because the cost of goods sold is understated (the purchase not recorded reduces expenses), leading to higher net income and thus higher retained earnings.

The Accountant for the Iris Company Did Not Record a Purchase