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The Auditor

As an auditor on the calendar year-end audit of Richard's Merchandise Company you travel to Denver to observe the year-end physical inventory. When you arrive in Denver at the client's site on December 30th you discover that the inventory process has just been started. You notice a trailer parked at the receiving dock and ask the warehouse manager is he is planning to inventory the contents of the trailer. He responds "We are not going to include the contents of the trailer in our inventory."

Later that day, you ask the accounts payable clerk for a copy of the invoice for the goods in the trailer at the dock. The invoice is from a vendor in Albuquerque, it is dated December 23rd and it is marked f.o.b. Albuquerque with terms of net 30 days. The clerk confirms that the invoice will not be entered into their accounting system until January.

Answer the following questions:

Does your client have a liability that should be reported in the current year financial statements? Why or why not?

Why would your client wish to postpone recording this transaction?

Solution Preview

Does your client have a liability that should be reported in the current year financial statements? Why or why not?

The client absolutely has a liability that should be reported in the current year's financial statements. The trailer is at the receiving dock and is told that the contents are not going to be included in the current inventory count. The AP clerk has an invoice for the merchandise that is dated before year-end and is marked FOB (freight on board, also called free on board). The invoice is due by 01-23 and the invoice will not be entered ...

Solution Summary

Does your client have a liability that should be reported in the current year financial statements? Why or why not?

Why would your client wish to postpone recording this transaction?

$2.19