Answered: hen use checkmarks to identify which…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

You are working as a summer intern for AAA Auditing. You have been asked to help resolve discrepancies noted in the audit for Dolfin Company, a retailer of specialty aquarium supplies.

As a merchandising company, Dolfin Company uses the perpetual inventory system. To prepare for this assignment, you have been asked to review your knowledge of sales and purchase transactions by completing the following table.

Consider the effect of each transaction on the three accounts listed, then use checkmarks to identify which accounts are debited or credited. If none of these accounts is affected by the transaction, check the “No Effect” box.

	Merchandise Inventory	Estimated Returns Inventory	Cost of Merchandise Sold	No Effect
Debit	Credit	Debit	Credit	Debit	Credit
Purchase of merchandise for resale
Customer returns
Customer payment on account
Payment of service fee for processing credit card sales
Sale on account
Return of merchandise purchased for resale
Yearly estimate for customer returns
Freight paid for sales with FOB destination
Cash sale of merchandise
Freight paid for merchandise purchased FOB shipping point

Auditing Observations

After going through the accounting records of Dolfin Company in detail, the auditor made a list of observations. You have been asked to review the effect of these observations.

For each observation, use checkmarks to identify which items on the income statement are overstated or understated. If none of these items is affected by the observation, check the “No Effect” box.

Observations	Sales	Cost of Merchandise Sold	Gross Profit	Operating Expenses	Income from Operations	No Effect
Overstated	Understated	Overstated	Understated	Overstated	Understated	Overstated	Understated	Overstated	Understated
While the company accountant was on vacation, the cost of each sale was not recorded for sales transactions.
Inventory shrinkage was credited to Miscellaneous Selling Expense.
All freight costs were charged to Delivery Expense regardless of the terms of sale.
Customer returns and allowances were sometimes debited to Estimated Returns Inventory and credited to Sales.
Office supplies expense was included in administrative expenses.
Credit card processing fees were debited to Cost of Merchandise Sold.
Sales tax collected on each sale was credited to Cost of Merchandise Sold.

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