Michael Company shipped merchandise to PJ Sales on December 31, Year 1, terms FOB destination. The merchandise arrives at PJ’s on January 4, Year 2. Which company should include the inventory on its December 31, Year 1 balance sheet?

1. Michael Company
2. PJ Sales

Determine the effect on a company’s Assets and Net Income from the following transaction: a loss on inventory is recorded as an adjusting entry.

	Assets	Net Income
A	Decreased	Decreased
B	Decreased	No effect
C	Increased	No effect
D	Increased	Increased
E	None of the above

Determine the effect on a company’s Assets and Net Income from the following transaction: a company using the perpetual inventory method ships goods costing $5,000 to a customer FOB shipping point. The sale price is $8,000.

	Assets	Net Income
A	Decreased	Decreased
B	Decreased	No effect
C	Increased	No effect
D	Increased	Increased
E	None of the above

Ancient Inc. shipped merchandise to Cantor Company on December 26, Year 1, FOB shipping point. The merchandise arrived at Cantor on January 2, Year 2. Which company should include the inventory on its December 31, Year 1 balance sheet?

1. Ancient Inc.
2. Cantor Company

A company began operations at the start of Year 1.

During the year, it had cash sales of $50,000 and credit sales of $450,000. The company collected $420,000 in cash from the credit sales. The company purchased inventory costing $250,000 and paid $18,000 in dividends. The company incurred the following expenses:

Cost of goods sold	210,000	Rent expense	6,000
Salary expense	80,000	Depreciation expense	4,000
Interest expense	5,000	Income tax expense	57,000

Using this information, answer the following questions.

1. What would Operating Income on the Dec. 31, Year 1 Income Statement be reported as?
2. As of Dec. 31, Year 1, determine the ending balance in the Accounts Receivable
3. Determine Ending Retained Earnings as of December 31, Year 1

A company discovered in Year 3 that the following inventory errors had occurred:

• Ending Inventory for Year 1 was understated by $5,000.
• Ending Inventory for Year 2 was overstated by $7,000.

Determine the effect those errors would have on the Year 1 and Year 2 financial statements:

1. How do the errors above affect Assets reported on the Year 1 financial statements? Assets would be...
   • a. Overstated by $2,000
   • b. Overstated by $5,000
   • c. Overstated by $7,000
   • d. Understated by $5,000
   • e. Understated by $12,000
2. How do the errors above affect Net Income reported on the Year 1 financial statements? Net income would be...
   • a. Overstated by $2,000
   • b. Overstated by $5,000
   • c. Overstated by $7,000
   • d. Understated by $5,000
   • e. Understated by $12,000
3. How do the errors above affect Assets reported on the Year 2 financial statements? Assets would be...
   • a. No effect on assets
   • b. Overstated by $2,000
   • c. Overstated by $7,000
   • d. Understated by $2,000
   • e. Understated by $7,000
4. How do the errors above affect Net Income and Shareholders’ Equity reported on the Year 2 financial statements? Net Income and Shareholders’ Equity would be...

   	Net Income	Shareholders’ Equity
   A	Understated by $12,000	Understated by $7,000
   B	Overstated by $5,000	No effect
   C	Overstated by $7,000	Overstated by $2,000
   D	Overstated by $7,000	Overstated by $7,000
   E	Overstated by $12,000	Overstated by $7,000