Question

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".

Answer 1

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

Answer 2

None of these were right