Question:

(Objective 18-6) The physical inventory for Ajak Manufacturing

was taken on December 30, 2013, rather than December 31, because
the client had to operate the plant for a special order the last day of
the year. At the time of the client’s physical count, you observed
that acquisitions represented by receiving report number 2631 and
all preceding ones were included in the physical count, whereas
inventory represented by succeeding numbers was excluded. On the
evening of December 31, you stopped by the plant and noted that
inventory represented by receiving report numbers 2632 through
2634 was received subsequent to the physical count but before the
end of the year. You later noted that the final inventory on the
financial statements contained only those items included in the
physical count. In testing accounts payable at December 31, 2013,
you obtain a schedule from the client to aid you in testing the
adequacy of the cutoff. The following schedule includes the
information that you have not yet resolved:

Receiving Amount Amount INFORMATION ON THE

Report of Presently VENDOR'S INVOICE
Number Vendor's Included
Invoice in or
Excluded
from Invoice Shipping FOB
Accounts Date Date Origin or
Payable* Destination

2631 $4,256.40 Included 12-30- 12-30- Origin

13 13

2632 6,320.54 Excluded 12-26- 12-15- Destination

13 13

2633 3,761.22 Included 12-31- 12-26- Origin

13 13

2634 7,832.18 Excluded 12-16- 12-27- Destination

This study source was downloaded by 100000841689221 from CourseHero.com on 02-27-2022 20:38:08 GMT -06:00

https://www.coursehero.com/file/65576118/Exam0753pdf/
 13 13

2635 6,847.77 Included 12-28- 12-31- Origin

13 13

2636 6,373.58 Excluded 01-03- 12-31- Destination

14 13

2637 5,878.36 Excluded 01-05- 12-26- Origin

14 13

2638 3,355.05 Excluded 12-31- 01-03- Origin

13 14

a. Explain the relationship between inventory and

accounts payable cutoff.

b. For each of the receiving reports, state the

misstatement in inventory or accounts payable, if any
exists, and prepare an adjusting entry to correct the
financial statements, if a misstatement exists.

c. Which of the misstatements in part b are most

important? Explain.

Objective 18-6

Design and perform tests of details of balances for accounts

payable, including out-of-period liability tests.

Answer :

(a)
This study source was downloaded by 100000841689221 from CourseHero.com on 02-27-2022 20:38:08 GMT -06:00

https://www.coursehero.com/file/65576118/Exam0753pdf/
 Relationship between inventory and accounts payable cutoff:

It is necessary to have coordination between the cutoff tests and the

physical observation of the inventory. In case there is an
inconsistency between the two then there may be a large
misstatement in the income statement as well as in the balance
sheet. For example, suppose an acquisition of inventory for $20,000
is received late afternoon of December 31, post the completion of
physical inventory. In case such an acquisition is the part of
accounts payable and purchased but excludes the inventory then it
will result into understated earnings of $20,000. But if the
acquisitions are not the part of accounts payable as well as inventory
then there will be a misstatement in the balance sheet whereas the
income statement is right.

(b)

Following is the description of misstatement and the adjusting entry for each of the
receiving report:

(c)

Normally, misstatements that impact earnings are considered to be the most

important because earnings are important to the users of financial statements. In the
problem, receiving report number 2633 and 2635 impact earnings. Also, such
misstatements assumes important because these represents the recording of a part of
the entry. In case these are not adjusted, then the balance of the inventory in the
following year will be understated by $10,608.99. For other receiving report
numbers 2632, 2634 and 2637, the misstatement is not that important because the
recording of the same will be done in the following year and then the balance of the
account would be appropriate.
This study source was downloaded by 100000841689221 from CourseHero.com on 02-27-2022 20:38:08 GMT -06:00

https://www.coursehero.com/file/65576118/Exam0753pdf/
 This study source was downloaded by 100000841689221 from CourseHero.com on 02-27-2022 20:38:08 GMT -06:00

https://www.coursehero.com/file/65576118/Exam0753pdf/
Powered by TCPDF (www.tcpdf.org)