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Misstatements in Confirming Individual Accounts Receivable Balances

In confirming individual accounts receivable balances, your client's customers reported the exceptions listed below.
Which of these exceptions should be considered misstatements for evaluation purposes, assuming that misstatements are defined as

(a) differences that affect the account balance and
(b) differences that affect pretax income?

Explain your reasoning in each instance.
1. The wrong trade discount was used.
2. The client charged sales tax to a tax-exempt customer.
3. The client failed to record returned merchandise.
4. The invoice contained a clerical error.
5. The payment was posted to the wrong customer's account.
6. The client failed to record a sale.
7. The payment was in transit at the confirmation date.
8. Freight was charged to the customer when the terms were FOB destination.
9. The customer subtracted a cash discount for a payment made after the discount period. The client decided to give credit for the discount taken.

Solution Preview

Differences that affect the customers' account balances are true in statements 1, 2, 3, 4, 5, 6, 7, 8, 9.
Differences that affect pretax income are true in statements 1, 3, 4, 6, 7, 8, 9.

See notes following for possible alternative interpretation of statements 7 and 9.

1. Using the wrong trade discount changes the amount of the receipts and therefore changes net sales. It also affects the balance in the customer account.

2. Sales tax collected from a customer is reported as a liability to the taxing ...

Solution Summary

In a 348 word solution, each situation is explained in a sentence or two.