Q5TI - Horngren'S Financial And Managerial Accounting

Question

The Shirley’s Gourmet Foods’ merchandise inventory data for the year ended December 31, 2018, follow:

Net Sales Revenue	\( 48,000
Cost of Goods Sold:
Beginning Merchandise Inventory	\) 3,360
Net Cost of Purchases	21,280
Cost of Goods Available for Sale	24,640
Less: Ending Merchandise Inventory	4,960
Cost of Goods Sold	19,680
Gross Profit	\( 28,320

Assume that the ending merchandise inventory was accidentally overstated by \)1,920. What are the correct amounts for cost of goods sold and gross profit?

Step-by-Step Solution

Answer

Correct COGS: $21,600

Correct Gross Profit: $26,400

Step 1: Correct amount of COGS

As the ending inventory has been overstated by $1,920, then the COGS must have been understated by the same amount. So to compute the correct amount for COGS, COGS must be adjusted for the error amount.

$\begin{array}{c}\mathbf{C}\mathbf{o}\mathbf{r}\mathbf{r}\mathbf{e}\mathbf{c}\mathbf{t}\mathbf{ }\mathbf{C}\mathbf{O}\mathbf{G}\mathbf{S}\mathbf{=}\mathbf{C}\mathbf{u}\mathbf{r}\mathbf{r}\mathbf{e}\mathbf{n}\mathbf{t}\mathbf{ }\mathbf{C}\mathbf{O}\mathbf{G}\mathbf{S}\mathbf{+}\mathbf{E}\mathbf{r}\mathbf{r}\mathbf{o}\mathbf{r}\mathbf{ }\mathbf{A}\mathbf{m}\mathbf{o}\mathbf{u}\mathbf{n}\mathbf{t}\\ \mathbf{=}\mathbf{\$}\mathbf{19}\mathbf{,}\mathbf{680}\mathbf{+}\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{920}\\ \mathbf{=}\mathbf{\$}\mathbf{21}\mathbf{,}\mathbf{600}\end{array}$

Step 2: Correct amount of Gross profit

$\begin{array}{c}\mathbf{C}\mathbf{o}\mathbf{r}\mathbf{r}\mathbf{e}\mathbf{c}\mathbf{t}\mathbf{ }\mathbf{g}\mathbf{r}\mathbf{o}\mathbf{s}\mathbf{s}\mathbf{ }\mathbf{p}\mathbf{r}\mathbf{o}\mathbf{f}\mathbf{i}\mathbf{t}\mathbf{=}\mathbf{N}\mathbf{e}\mathbf{t}\mathbf{ }\mathbf{S}\mathbf{a}\mathbf{l}\mathbf{e}\mathbf{s}\mathbf{ }\mathbf{R}\mathbf{e}\mathbf{v}\mathbf{e}\mathbf{n}\mathbf{u}\mathbf{e}\mathbf{-}\mathbf{C}\mathbf{o}\mathbf{r}\mathbf{r}\mathbf{e}\mathbf{c}\mathbf{t}\mathbf{ }\mathbf{C}\mathbf{O}\mathbf{G}\mathbf{S}\\ \mathbf{=}\mathbf{\$}\mathbf{48}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{\$}\mathbf{21}\mathbf{,}\mathbf{600}\\ \mathbf{=}\mathbf{\$}\mathbf{26}\mathbf{,}\mathbf{400}\end{array}$