Question

Chamberlain Company buys designer clothing to sell in its retail stores. Since much of the merchandise comes from Dallas and Europe, Chamberlain Company must pay freight charges to get the merchandise shipped in. Which statement is true?

a. Freight charges are only paid by a buyer in a periodic system.
b. Transportation-in, paid by Chamberlain Company, is added to the inventory account under the periodic system.
c. Transportation-in, paid by Chamberlain Company, is subtracted from purchases under the periodic system.
d. Transportation-in is added to net purchases to determine cost of goods purchased in a periodic system.

Answer 1

In a periodic inventory system, transportation-in costs, such as freight charges, are added to net purchases when calculating the total cost of goods purchased. The statement that transportation-in is added to net purchases to determine cost of goods purchased in a periodic system is true.

Step-by-step explanation:

The question addresses how freight charges related to inventory should be accounted for in a periodic inventory system. When a company like Chamberlain Company purchases merchandise and pays for the transportation of that merchandise, known as transportation-in, this cost is generally factored into the cost of inventory. Specifically, under a periodic inventory system, transportation-in costs are added to the cost of purchases when determining the total cost of goods purchased.

Therefore, the correct statement regarding the treatment of freight charges is:

Transportation-in is added to net purchases to determine cost of goods purchased in a periodic system.

Understanding the inclusion of transportation-in costs is important for accurate inventory valuation and ensuring cost of goods sold reflects all costs associated with bringing inventory to a saleable state. Choosing locations with access to uncrowded freeways or multiple transport options can significantly influence these costs.