Question

If a company uses the periodic inventory system, what is the impact on net income of including goods in transit f.o.b. shipping point in purchases, but not ending inventory

Answer 1

Net Income will be undervalued.

Step-by-step explanation:

In a Free on Board shipping (FOB) the Buyer assumes all risks and rewards of ownership of the goods purchased when the goods have been loaded or passed the shipping rail.

The costs incurred at Free on Board shipping (FOB) must be included in both the Purchases and Ending Inventory. If the cost is not included in ending inventory, this means Cost of Sales will be overvalued and consequently Gross Profit and Net Income will be undervalued.