Q 24E-1 - Horngren'S Financial And Managerial Accounting

Question

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

1. Prepare corrected income statements for the two years.

Step-by-Step Solution

Answer

Correct Net income (2018): $28,500

Correct Net income (2019): $36,500

Step-by-Step-Solution Step 1: Overstated ending inventory error

In case the ending inventory is overstated, then as a result the cost of issued inventory would be lower than the actual figure. So, due to lower COGS, the gross profit would be higher.

 

When that ending inventory would be carried forward to the next accounting period, then the opening inventory for that period would also be overstated. So in this case the value of overstated opening inventory would result in a higher cost of goods sold and the value of gross profit would be lower.

Step 2: Corrected income statement

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