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General Accounting Discussions: Few Questions

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    May Company buys designer clothing to sell in its retail stores. Since much of the merchandise comes from New York and Europe, May Company must pay freight charges to get the merchandise shipped in. Which statement is true?
    Transportation-in, paid by May Company is added to the inventory account under the periodic system.
    Transportation-in, paid by May Company is subtracted from purchases under the periodic system.
    Freight charges are only paid by a buyer in a periodic system.
    Transportation-in is added to net purchases to determine cost of goods purchased in a periodic system.

    Id like to know the reasoning behind the answer. I'm a bit confused with the periodic system.
    • CommentAuthorabril
    • CommentTimeSep 27th 2007
     
    the correct answer is the 4th statement..

    to answer the question simply remember the statement of cost of goods sold >

    beginning inventory + purchases (less returns and allowances) + freight-in = goods available for sale - ending inventory = cost of goods sold

    periodic system is used in high volume product where its impractical to keep tracts of every single unit of products so instead you take a physical count every end of the period to determine your cost of goods sold.

    hope that helps

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