An improper cutoff of transactions around year-end occurs when journal entries are recorded in the wrong year. In this case, you are to determine the effects of various cutoff misstatements relating to recording cash receipts received on accounts receivable and the recording of credit sales. To effectively consider the effects of an improper cutoff, it is helpful to consider the underlying journal entries:

An example of a possible improper cutoff is to “close” the cash receipts journal on December 30 and include December 31 sales in the subsequent year (e.g., the entry is dated January 1 rather than December 31). As a result, cash is understated by $3,000, while accounts receivable is overstated by $3,000 for the year just ended. The effects of closing the sales journal depend upon whether a periodic inventory or perpetual inventory system is in use. The effects of “leaving open” journals past year-end and dating January entries as of December may be determined in a similar manner.
Assume that the client made the following actual credit sales and received cash receipts as follows after 12/29/20X8:

Determine the overstatements and understatements that would result from the following situations. Assume that each situation is independent of one another. As an illustration, situation 1 has been solved for you. To simplify the problem, in the case of a perpetual inventory, assume that the year-end inventory count did not identify and correct themisstatement(s).

  • CreatedOctober 27, 2014
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