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Horngren'S Financial And Managerial Accounting
Found in: Page 368

Short Answer

Question: Empire State Carpets’s books show the following data. In early 2020, auditors foundthat the ending merchandise inventory for 2017 was understated by $8,000 and thatthe ending merchandise inventory for 2019 was overstated by $9,000. The ending merchandiseinventory at December 31, 2018, was correct.

2019

2018

2017

Net Sales Revenue

$ 220,000

$ 162,000

$ 176,000

Cost of Goods Sold:

Beginning Merchandise Inventory

$22,000

$29,000

$46,000

Net cost of purchase

132,000

90,000

76,000

Cost of goods available for sale

154,000

119,000

122,000

Less: Ending Merchandise Inventory

32,000

22,000

29,000

Cost of goods sold

122,000

97,000

93,000

Gross Profit

98,000

65,000

83,000

Operating Expenses

72,000

38,000

48,000

Net Income

$ 26,000

$ 27,000

$ 35,000

Requirements

1. Prepare corrected income statements for the three years.

Correct figures for 2017, 2018, and 2019 -

2017

2018

2019

Opening Inventory

-

$37,000

-

Ending Inventory

$37,000

-

$23,000

COGS

$85,000

$105,000

$131,000

Gross Profit

$91,000

$57,000

$89,000

Net Income

$43,000

$19,000

$17,000

See the step by step solution

Step by Step Solution

Step-by-Step-SolutionStep1: Income statement

An income statement is the list of all incomes and expenses that are incurred for a given period. These expenses and incomes are segregated at each level of business activity and based on this gross and net income are determined

Step 2: Corrected income statement

As the ending inventory for 2017 and 2019 has been entered incorrectly, the corrected income statement would be made after adjusting for this error.

Correct Income statement

2019

2018

2017

Net Sales Revenue

$ 220,000

$ 162,000

$ 176,000

Cost of Goods Sold:

Beginning Merchandise Inventory

$22,000

$37,000

$46,000

Net cost of purchase

132,000

90,000

76,000

Cost of goods available for sale

154,000

127,000

122,000

Less: Ending Merchandise Inventory

23,000

22,000

37,000

Cost of goods sold

131,000

105,000

85,000

Gross Profit

89,000

57,000

91,000

Operating Expenses

72,000

38,000

48,000

Net Income

$ 17,000

$ 19,000

$ 43,000

Step 3: Explanation for the above income statement

The income statement above has been corrected by making the ending inventory for2017 correct first. This correction has made the ending inventory for 2017 amount to $37,000. Thus the opening inventory for 2018 has also become the same.

The above correction led to a change in the cost of goods sold and gross profit for 2017 and 2018.

In 2019 the ending inventory was again corrected for overestimation. This has affected the cost of goods sold and gross profit for 2019.

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