A retail company recently completed a physical count of ending merchandise inventory to use in preparing adjusting entries. In determining the cost of the counted inventory, company employees failed to consider that $3,000 of incoming goods had been shipped by a supplier on December 31 under an FOB shipping point agreement. These goods had been recorded in Merchandise Inventory as a purchase, but they were not included in the physical count because they were in transit.
a. Explain how this overlooked fact impacts the company’s balance sheet and income statement.
b. Indicate whether this overlooked fact results in an overstatement, understatement, or no effect on the following separate ratios: return on assets, debt ratio, current ratio, and acid-test ratio.
Return on assets and the current ratio will decline, whereas the quick ratio will remain unaffected and the debt ratio will increase.
The amount of inventory reported in the balance sheet, but which does not exist in the physical count is known as inventory shrinkage. Business entities incur loss due to such shrinkage.
There will be a difference between actual and physical inventory because the inventory of $3,000 is in transit and is reported on the balance sheet. Such difference will be reported as inventory shrinkage in the accounting books as the cost of goods sold will understate the net income, equity, current assets, and total assets.
The operating cycle of a merchandiser with credit sales includes the following five activities. Starting with merchandise acquisition, identify the chronological order of these five activities.
a. Prepare merchandise for sale.
b. Collect cash from customers on account.
c. Make credit sales to customers.
d. Purchase merchandise.
e. Monitor and service accounts receivable.
Santa Fe Retailing purchased merchandise “as is” (with no returns) from Mesa Wholesalers with credit terms of 3∕10, n∕60 and an invoice price of $24,000. The merchandise had cost Mesa $16,000. Assume that both buyer and seller use a perpetual inventory system and the gross method.
1. Prepare entries that the buyer records for the (a) purchase, (b) cash payment within the discount period, and (c) cash payment after the discount period.
2. Prepare entries that the seller records for the (a) sale, (b) cash collection within the discount period, and (c) cash collection after the discount period.
The following list includes selected permanent accounts and all of the temporary accounts from the December 31, 2017, unadjusted trial balance of Emiko Co. Use these account balances along with the additional information to journalize (a) adjusting entries and (b) closing entries. Emiko Co. uses a perpetual inventory system.
Prepaid selling expenses
Sales return and allowances
Cost of goods sold
Sales salaries expenses
Accrued sales salaries amount to $1,700. Prepaid selling expenses of $3,000 have expired. A physical count of year-end merchandise inventory shows $28,700 of goods still available.
BTN 4-6 Official Brands’s general ledger and supplementary records at the end of its current period reveal the following.
Sales return and allowances
Invoice cost of merchandise purchases
Purchase discount received
Cost of transportation-in
Purchase return and allowances
Merchandise inventory (end of period)
1. Each member of the team is to assume responsibility for computing one of the following items. You are not to duplicate your teammates’ work. Get any necessary amounts to compute your item from the appropriate teammate. Each member is to explain his or her computation to the team in preparation for reporting to the class.
2. Check your net income with the instructor. If correct, proceed to step
3. Assume that a physical inventory count finds that actual ending inventory is $76,000. Discuss how this affects previously computed amounts in step 1.
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