Chapter 4, Problem 13E

To determine

Adjusting Entries:

The accounting entries which are made at the end of an accounting period to change the closing balances of various general ledger accounts are known as adjusting entries. They are made to align the reported results and financial position of the business in accordance with the accounting framework, such as GAAP or IFRS.

Inventory Shrinkage:

Inventory shrinkage states that amount of inventory which is more than the actual amount of inventory listed in accounting record but not in existence. It includes the amount of inventory lost by fire, amount of inventory theft and damaged.

FOB Shipping Point:

It means the cost of movement of goods on board of a ship or an airline is to be borne by seller. It means rest all the expenses are to be borne by buyer.

Return on Assets:

It is a financial ratio which represents the profit percentage a company earns with respect to its overall resources.

Formula to compute return on assets is,

$\text{Return}\text{on}\text{assets}=\frac{\text{Net}\text{income}}{\text{Total}\text{assets}}$

Debt Ratio:

Debt ratio is a measurement tool to identify company’s ability to pay of its debt through its total assets.

Formula to compute debt ratio is,

$\text{Debt}\text{ratio}=\frac{\text{Total}\text{debt}}{\text{Total}\text{assets}}$

Current Ratio:

It is ratio which gives idea about the ability of company to pay it liabilities.

Formula to compute current ratio is,

$\text{Current}\text{ratio}=\frac{\text{Current}\text{assets}}{\text{Current}\text{liabilities}}$

Acid Test Ratio:

Acid test ratio is a measurement tool to identify that whether a company has enough quick assets to repay its current liabilities or not.

Formula to compute acid test ratio,

$\text{Acid}\text{test}\text{ratio}=\frac{\text{Current}\text{assets}-\text{Stock}}{\text{Current}\text{liabilities}}$

To explain: The impact, of overlooking on financial statements and on return on asset, debt ratio, current ratio, acid test ratio