Question

Merchandise that was purchased on the 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?

Answer 1

In the balance sheet the assets would be understated, merchandise inventory would be lower, which would unbalance the balance sheet. The transaction was already recorded, so accounts payable increased.

If the merchandise was not sold yet, then the income statement wouldn't be altered, but if the merchandise was sold then the COGS could have been understated, resulting in income overstating.