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

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.

The accountant for Dolfin Company prepared the income statement below. The auditor has asked you to use this statement to provide additional information to Dolfin Company on the Final Questions panel.

Dolfin Company

Income Statement

For the Year Ended December 31

1	Sales		$319,340.00
2	Expenses:
3	Cost of merchandise sold	$217,151.20
4	Selling expenses	41,514.20
5	Administrative expenses	35,127.40
6	Interest expense	275.00
7	Total expenses		294,067.80
8	Net income		$25,272.20

The auditor has asked you to prepare additional information about Dolfin Companys results for last year. Use the data shown on the income statement in your calculations.

1. Calculate the operating expenses for Dolfin Company.

2. Calculate the gross profit for Dolfin Company.

3. Calculate the income from operations for Dolfin Company.