31PGA_1 - Horngren'S Financial And Managerial Accounting

Question

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.

Step-by-Step Solution

Answer

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

Step-by-Step-Solution Step1: 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.