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If it is mentioned in the question the a company purchases goods from suppliers and the goods are in transit for up to three weeks, then the inventory could be overstated or misstated.
What is more correct overstated or misstated.
Also if it is written that cut off of payables is incorrect. Is this correct because payables is an account balance
Also if it is written that cut off of purchases and inventory is incorrect. Then is this statement correct because cut off should only be used with purchases and not inventory
Hmmmm … if the company isn’t liable for the goods until they are received, there shouldn’t really be a risk to inventory valuation per se. It’s all about the cut-off on purchases (which must affect payables because that is th other side of the entry) – and then whether inclusion/exclusion of inventory at the y/e is consistent with the purchase/payable is recognised before or after the y/e.
If purchase/payable recognised before y/e, goods should be included in inventory.
If purchase/payable recognised after y/e, goods should be excluded from inventory.If you take a look at this post you will find references to where you can find futher explanation in the notes https://opentuition.com/topic/goods-in-transit-6
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