Question

Niosoki Auto Parts sells new parts for foreign automobiles to auto dealers. Company policy requires that a prenumbered shipping document be issued for each sale. At the time of pickup or shipment, the shipping clerk writes the date on the shipping document. The last shipment made in the fiscal year ended August 31, 2016, was recorded on document 2167. Shipments are billed in the order that the billing clerk receives the shipping documents. For late August and early September, shipping documents are billed on sales invoices as follows: Shipping Document No. Sales Invoice No. 2163 5437 2164 5431 2165 5432 2166 5435 2167 5436 2168 5433 2169 5434 2170 5438 2171 5440 2172 5439 The August and September sales journals have the following information included: SaLeS JOUrNaL — aUGUSt 2016 Day of Month Sales Invoice No. amount of Sale 30 5431 $ 726.11 30 5434 4,214.30 31 5432 419.83 31 5433 1,620.22 31 5435 47.74 SaLeS JOUrNaL — SepteMBer 2016 Day of Month Sales Invoice No. amount of Sale 1 5437 $2,541.31 1 5436 106.39 1 5438 852.06 2 5440 1,250.50 2 5439 646.58 a. What are the accounting requirements for a correct sales cutoff? b. Which sales invoices, if any, are recorded in the wrong accounting period? Prepare an adjusting entry to correct the financial statement for the year ended August 31, 2016. Assume that the company uses a periodic inventory system (inventory and cost of sales do not need to be adjusted).

Answer 1

Answer:

Cut-off misstatement

Cut-off misstatement refers to improper recognition of the sales related transactions near the end of the accounting period either in the current period or in the subsequent period. The cut-off audit objective is very important for the auditor as the misstatement due to cut-off can affect the current year income significantly.

a.

The accounting requirement for a correct sales cut-off is to record the sales on the shipment of goods criterion or at the time the title transferred from the seller to the buyer, that may happen before shipment of goods, at the time of shipment of goods or subsequent to the shipment of goods. But whatever method used, it must be in accordance with the accounting standards and must be applied consistently for correct measurement the current period income.

b.

Following sales invoices are recorded in the wrong accounting period:

Sales invoice number     Wrong accounting      Correct accounting

                                             period                              period

5434                                 August 2016                  September 2016

5433                                 August 2016                    September 2016

5437                                 September 2016              August 2016

5436                                  September 2016             August 2016

Note: The wrong accounting period is identified on the basis of the sales invoice number issued against corresponding shipping document number (pre-numbered) issued on or before August 31, 2016 for sales cut-off.

The sales invoice for September 2016 wrongly recorded in accounting period August 2016 are as follows:

Sales invoice number                Amount ($)

5434                                         4,214.30

5433                                          1,620.22

Total                                           5,834.52

Prepare the following adjusting journal entry to correct the misstatement (overstatement) in accounting period of August 2016, as follows:

Journal entries

Date          Account Title and Explanation          Debit             Credit    

Aug.31          Sales (E-)                                         5,834.52

                   Sales in advance (E+)                                             5,834.52

(To rectify sales overstated for August 2016)

Explanation:

Owners’ equity is decreased for reducing the sales amount, hence sales is debited. Similarly owners’ equity increased for the sales in advance, hence sales in advance is credited.

The sales invoice of August 2016 wrongly recorded for September 2016 are as follows:

Sales invoice number                  Amount ($)

5437                                             2,542.31

5436                                             106.39

Total                                              2,648.70

Prepare the following adjusting journal entry to correct the misstatement (understatement) in accounting period of August 2016, as follows:

Journal entry

Date         Account Title and Explanation            Debit                   Credit

Aug.31        Sales-Sep 2016 (E-)                            2,648.70

                   Sales-Aug 2016 (E+)                                                  2,648.70

(To rectify the understatement of sales for August 2016)

Explanation:

Owners’ equity declines for Sales-Sep 2016, hence it is debited. Similarly owners’ equity is increased for sales for August 2016, hence it is credited.