Question

Taha Company purchased inventory FOB shipping point and sold that inventory FOB destination. This means Taha must pay freight-in and freight-out. If the freight charges were $100 each and both the purchase and the sale took place during the accounting period, by what amount did the freight charges reduce Revenue in the calculation of Net Income?

Answer 1

Freight-out charges of $100 directly reduce revenue, impacting the calculation of net income, while freight-in costs are included in the COGS and do not directly reduce revenue.

Step-by-step explanation:

The student's question revolves around the accounting treatment of freight costs in the determination of net income. Taha Company incurred freight-in and freight-out charges of $100 each, with the inventory being purchased FOB shipping point and sold FOB destination. In accounting, freight-in costs are considered part of the inventory cost and are therefore included in the Cost of Goods Sold (COGS), while freight-out costs are operating expenses and deducted from revenues.

In calculating net income, the freight-in costs increase the COGS and do not directly reduce revenue, whereas the freight-out costs are subtracted from revenue. Therefore, only the freight-out cost of $100 would directly reduce revenue. Since the question does not provide actual revenue figures, we cannot determine the exact impact on net income. Instead, we know that the $100 of freight-out will be deducted from the revenue to help arrive at the net income.