Question

20. Irene uses a calendar-year accounting period and a periodic inventory system. Assume Irene had the following independent situations:

• Situation 1. Goods shipped to Irene by a vendor f.o.b. shipping point on 12-28-11 were in transit at 12-31-11. The goods cost $15,000. On 12-29-11, Irene recorded a credit purchase of $15,000.
• Situation 2. Goods shipped by Irene to a customer f.o.b. destination on 12-29-11 were in transit at 12-31-11. The goods cost $5,000. On 12-29-11, Irene recorded a credit sale of $12,000.
• Situation 3. Goods shipped to Irene by a vendor f.o.b. destination on 12-30-11 were in transit at 12-31-11. The goods cost $8,000. On 12-30-11, Irene recorded a credit purchase of $8,000.

Assume Irene values the inventory reported on its balance sheet and the amount recorded as cost of goods sold on its income statement on the basis of its physical inventory count that Irene performed on 12-31-11. Irene counts whatever is on its premises. Individually discuss the effect (in dollars and direction, e.g., overstate, understate, no effect) that each of the above items has on:

• Irene’s sales revenue for the year ended 12-31-11
• Irene’s cost of goods sold for the year ended 12-31-11
• Irene’s accounts receivable as of 12-31-11
• Irene’s inventory as of 12-31-11
• Irene’s accounts payable as of 12-31-11
• Irene’s stockholders’ equity as of 12-31-11

Situation #	I’s sales for year ended 12-31-11	I’s COGS for year ended 12-31-11	I’s AR as of 12-31-11	I’s inventory as of 12-31-11	I’s AP as of 12-31-11	I’s SE as of 12-31-11
1
2
3

Remember, each box above should have BOTH an effect AND a $ amount.

Answer 1

Situation	I’s sales for year ended 12-31-11	I’s COGS for year ended	I’s AR as of 12-31-11	I’s inventory as of 12-31-11	I’s AP as of 12-31-11	I’s SE as of 12-31-11
#		12/31/2011
Situation 1. Goods shipped to Irene by a vendor f.o.b. shipping point on 12-28-11 were in transit at 12-31-11. The goods cost $15,000. On 12-29-11, Irene recorded a credit purchase of $15,000.				$15,000	$15,000	$15,000
				Increase	No effect	Increase
Situation 2. Goods shipped by Irene to a customer f.o.b. destination on 12-29-11 were in transit at 12-31-11. The goods cost $5,000. On 12-29-11, Irene recorded a credit sale of $12,000.	$12,000	$5,000	$12,000
	No effect	No effect	No effect
Situation 3. Goods shipped to Irene by a vendor f.o.b. destination on 12-30-11 were in transit at 12-31-11. The goods cost $8,000. On 12-30-11, Irene recorded a credit purchase of $8,000.				$8,000	$8,000	$8,000
				Increase	No effect	Increase