Hello Danhuan,
I agree sometimes questions are tricky and this is a typical example where our interpretations skills are tested and you are not alone. Let me try to explain:
the
first question has the following wordings "
As of December 31, Orion had recorded the transaction using the periodic method, but did not include the merchandise in its inventory.
this means the transaction was recorded but incorrectly. They records it as an expense instead of showing it in inventory. Because they expensed it, net income is low and hence retained earning also low, Accounts payable is recorded as well but Inventory was not recorded instead recording as expense. Hence Net income is low, current assets low and Retained earning is low ( Net income flows to retained earnings).
the second question has the following wordings " Horton, which uses the periodic method, had not recorded the transaction or included the merchandise in its inventory count"
As per this question, they have completely failed to record this question at all anywhere in the books. Hence accounts payables is not recorded, Inventory is not recorded. Hence currents and liabilities are understated ( Balance sheet will still match as it is a balancing error as transaction is missed both on assets and liabilities side). Since they completely missed to record the transaction even as expense , net income and retained earnings are not impacted. Hence stakeholders equity is not impacted.
Bottom line : first question transaction was recorded incorrectly and in the second question, the transaction was never recorded OR failed to record the transaction completely.
Hope this helps and let me know for any further clarifications.
Thanks,
Kiran------------------------------
Kiran Kulkarni
Director/Manager
BENGALURU
India
------------------------------
Original Message:
Sent: 05-15-2021 09:05 PM
From: Danhuan Tang
Subject: Inventory Errors
Hi everyone,
There are two questions below about misstated purchase of inventory. First question answer is A and second is C.
Retained earning will be understated in the first question but retained earning in statehold's equity will not be affected in the second question.
Please explain what the differences are in these questions.
Thank you very much!
Best,
Danhuan
Merchandise that was purchased on account was accepted by the Orion Company. As of December 31, Orion had recorded the transaction using the periodic method, but did not include the merchandise in its inventory. What would be the effect of this on the financial statements for December 31?
| The net income, current assets, and retained earnings would all be understated. |
| The net income would be correct and current assets would be understated. |
| The net income would be understated and current liabilities would be overstated. |
| | |
The Horton Corporation accepted the delivery on August 15, 20x4, of merchandise that it had purchased on account. As of August 31, Horton, which uses the periodic method, had not recorded the transaction or included the merchandise in its inventory count. What is the impact of this on their August 31, 20x4, balance sheet?
| The stockholders' equity would be the only item affected by the omission. |
| The assets, liabilities, and stockholders' equity would be understated. |
| The assets and liabilities would be understated but stockholders' equity would not be affected. |
| The assets and stockholders' equity would be overstated but liabilities would not be affected. |