36PGB_2 - Horngren'S Financial And Managerial Accounting

Question

Question: Antique Carpets’s books show the following data. In early 2020, auditors found that the ending merchandise inventory for 2017 was understated by \(8,000 and that theending merchandise inventory for 2019 was overstated by \)9,000. The ending merchandiseinventory at December 31, 2018, was correct.

	2019	2018	2017
Net Sales Revenue	\(     212,000	\)    161,000	\(   170,000
Cost of Goods Sold:
Beginning Merchandise Inventory	\)22,000	\(28,000	\)41,000
Net cost of purchase	131,000	100,000	86,000
Cost of goods available for sale	153,000	128,000	127,000
Less: Ending Merchandise Inventory	34,000	22,000	28,000
Cost of goods sold	119,000	106,000	99,000
Gross Profit	93,000	55,000	71,000
Operating Expenses	63,000	28,000	39,000
Net Income	\( 30,000	\) 27,000	$ 32,000

Requirements

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

Step-by-Step Solution

Answer

Net income for 2017, 2018, and 2019 has been understated, overstated, and understated respectively. The amount for the change has been $8,000, $8,000, and $9,000 respectively

Step-by-Step-Solution Step1: Comparative income statement before and after correction

	2019	2018	2017
	Before correction	After Correction	Before correction	After Correction	Before correction	After Correction
Net Sales Revenue	$212,000	$212,000	$161,000	$161,000	$170,000	$170,000
Cost of Goods Sold:
Beginning Merchandise Inventory	$22,000	$22,000	$28,000	$36,000	$41,000	$41,000
Net cost of purchase	131,000	131,000	100,000	100,000	86,000	86,000
Cost of goods available for sale	153,000	153,000	128,000	136,000	127,000	127,000
Less: Ending Merchandise Inventory	34,000	25,000	22,000	22,000	28,000	36,000
Cost of goods sold	119,000	128,000	106,000	114,000	99,000	91,000
Gross Profit	93,000	84,000	55,000	47,000	71,000	79,000
Operating Expenses	63,000	63,000	28,000	28,000	39,000	39,000
Net Income	$    30,000	$     21,000	$    27,000	$     19,000	$    32,000	$ 40,000

Step 2: Ney income before and after correction

Net income in 2017

In 2017 net income before the correction was $32,000 and after the correction, it was $40,000. So the net income in 2017 has been understated by $8,000.

 

Net income in 2018

In 2018 net income before the correction was $27,000 and after the correction, it was $19,000. So the net income in 2018 has been overstated by $8,000.

 

Net income in 2019

In 2019 net income before the correction was $30,000 and after the correction, it was $21,000. So the net income in 2019 has been understated by $9,000.