Final answer:
Including goods in transit in purchases but not ending inventory when using a periodic inventory system would overstate the current ratio. This is because it would reduce the total current assets due to understated inventory, while current liabilities remain the same, leading to a lower ratio.
Step-by-step explanation:
If a company uses the periodic inventory system, the inclusion of goods in transit (purchased f.o.b. shipping point) in purchases but not in the ending inventory would overstate the current ratio. The current ratio is calculated by dividing current assets by current liabilities. In a periodic inventory system, inventory levels and the cost of goods sold are determined at the end of the accounting period, not on a transaction-by-transaction basis.
By including goods in transit as purchases, you increase the total purchases amount, which could potentially increase the reported ending inventory if these goods were counted as part of the inventory count. However, since the question states that the goods in transit are not included in ending inventory, this implies that the expense side (cost of goods sold) would be higher because ending inventory is understated. This in turn reduces the total current assets. Meanwhile, the current liabilities remain unchanged.
Therefore, because the current assets are decreased (due to lower inventory value) and current liabilities are unchanged, the current ratio is reduced compared to what it would be if the goods were correctly accounted for in both purchases and ending inventory. The current ratio is a liquidity ratio that measures a company's ability to pay short-term obligations, and any misstatement in inventory levels could significantly distort this important financial metric.