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,
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 | |||||
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Debit | Credit | Debit | Credit | Debit | Credit | |||
Purchase of merchandise for resale |
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Customer returns |
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Customer payment on account |
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Payment of service fee for processing credit card sales |
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Sale on account |
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Return of merchandise purchased for resale |
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Yearly estimate for customer returns |
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Freight paid for sales with FOB destination |
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Cash sale of merchandise |
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Freight paid for merchandise purchased FOB shipping point |
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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 | ||||||
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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. |
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Inventory shrinkage was credited to Miscellaneous Selling Expense. |
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All freight costs were charged to Delivery Expense regardless of the terms of sale. |
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Customer returns and allowances were sometimes debited to Estimated Returns Inventory and credited to Sales. |
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Office supplies expense was included in administrative expenses. |
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Credit card processing fees were debited to Cost of Merchandise Sold. |
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Sales tax collected on each sale was credited to Cost of Merchandise Sold. |
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