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Q 24E-2

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Horngren'S Financial And Managerial Accounting
Found in: Page 365

Short Answer

Nature Foods Grocery reported the following comparative income statements for the years ended June 30, 2019 and 2018:

NATURE FOODS GROCERY
Income Statements
Years Ended June 30, 2019 and 2018

2019

2018

Net Sales Revenue

$ 134,000

$ 119,000

Cost of Goods Sold:

Beginning Merchandise Inventory

$17,000

$14,000

Net Cost of Purchases

78,000

67,000

Cost of Goods Available for Sale

95,000

81,000

Less: Ending Merchandise Inventory

18,000

17,000

Cost of Goods Sold

77,000

64,000

Gross Profit

57,000

55,000

Operating Expenses

26,000

21,000

Net Income

$ 31,000

$ 34,000

During 2019, Nature Foods Grocery discovered that ending 2018 merchandise inventory was overstated by $5,500.

Requirements

2. State whether each year’s net income—before your corrections—is understated or overstated, and indicate the amount of the understatement or overstatement.

Overstated amount before correction for 2018: $5,500

Understated amount before correction for 2019: $5,500

See the step by step solution

Step by Step Solution

Step-by-Step-SolutionStep 1: Net Income for 2018

Net income for 2018 before correction is $34,000.

But after the correction, the net income amounts to $28,500.

So the net income before the correction was overstated.

Step 2: Net Income for 2019

Net income for 2019 before correction is $31,000.

But after the correction, the net income amounts to $36,500.

So the net income before the correction was understated.

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