Mastery Problem: Accounting for Retail Businesses

Merchandising Transactions

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

As a retail company, Dolfin Corporation 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, and identify which accounts are debited or credited. If not affected by the transaction, select "No Effect".

		Inventory		Estimated Returns Inventory		Cost of Goods Sold
Purchase of merchandise for resale		credit or debit or no effect		credit or debit or no effect		credit or debit or no effect
Cash sale of merchandise		c or d or NE		c or d or NE		c or d or NE
Customer returns		c or d or NE		c or d or nE		c or d or NE
Yearly estimate for customer returns		c or d or NE		c or d or NE		c or d or NE
Freight paid for merchandise purchased FOB shipping point		c or d or NE		c or d or NE		c or d or NE
Return of merchandise purchased for resale		c or d or NE		c or d or NE		c or d or NE
Freight paid for sales with FOB destination		c or d or NE		c or d or NE		c or d or NE
Sale on account		c or d or NE		c or d or NE		c or d or NE
Customer payment on account		c or d or NE		c or d or NE		c or d or NE
Payment of service fee for processing credit card sales		c or d or NE		c or d or NE		c or d or NE

Auditing Observations

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

For each observation, identify which items on the income statement are overstated or understated. If not affected by the observation, select the "No Effect".

Observations		Sales		Cost of Goods Sold		Gross Profit		Operating Expenses		Operating Income
While the company accountant was on vacation, the cost of each sale was not recorded for sales transactions.
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.
Sales tax collected on each sale was credited to Cost of Goods Sold.
Inventory shrinkage was credited to Miscellaneous Selling Expense.
Credit card processing fees were debited to Cost of Goods Sold.

Income Statement

The accountant for Dolfin Corporation prepared the following income statement. The auditor has asked you to use this statement to provide additional information to Dolfin Corporation on the Final Questions.

Dolfin Corporation Income Statement For the Year Ended December 31, 20Y8
Sales			$317,340
Expenses:
Cost of goods sold	$215,791
Selling expenses	41,254
Administrative expenses	34,907
Interest expense	275
Total expenses			(292,227)
Net income			$25,113

Final Questions

The auditor has asked you to prepare additional information about Dolfin Corporations results for last year. Use the data shown on the income statement in your computations.

1. Compute the operating expenses for Dolfin Corporation. $

2. Compute the gross profit for Dolfin Corporation. $

3. Compute the operating income for Dolfin Corporation. $