You are working as a summer intern for AAA Auditing. You have been asked to help resolve discrepancies noted in the audit for Dolfin Company, a retailer of specialty aquarium supplies.

As a merchandising company, Dolfin Company uses the perpetual inventory system. To prepare for this assignment, you have been asked to review your knowledge of sales and purchase transactions by completing the table below.

Consider the effect of each transaction on the three accounts listed, then use checkmarks to identify which accounts are debited or credited. If none of these accounts is affected by the transaction, check the No Effect box.

	Inventory		Estimated Returns Inventory		Cost of Goods Sold		No Effect
	Debit	Credit	Debit	Credit	Debit	Credit
Freight paid for sales with FOB destination
Purchase of merchandise for resale
Freight paid for merchandise purchased FOB shipping point
Customer payment on account
Sale on account
Customer returns
Return of merchandise purchased for resale
Yearly estimate for customer returns
Cash sale of merchandise
Payment of service fee for processing credit card sales

Auditing Observations

After going through the accounting records of Dolfin Company in detail, the auditor made a list of observations. You have been asked to review the effect of these observations.

For each observation, use checkmarks to identify which items on the income statement are overstated or understated. If none of these items is affected by the observation, check the No Effect box.

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.
Office supplies expense was included in administrative expenses.
Inventory shrinkage was credited to Miscellaneous Selling Expense.
Sales tax collected on each sale was credited to Cost of Merchandise Sold.
Customer returns and allowances were sometimes debited to Estimated Returns Inventory and credited to Sales.
Credit card processing fees were debited to Cost of Merchandise Sold.
While the company accountant was on vacation, the cost of each sale was not recorded for sales transactions.