state whether each year rsquo s net income mdash before your corrections mdash is un 559732

Correcting an inventory error—two years

Great Foods Grocery reported the following comparative income statement for the years ended June 30, 2012 and 2011:

GREAT FOODS GROCERY Income Statements Years Ended June 30, 2012 and 2011

2012

2011

Sales revenue

$ 139,000

$ 120,000

Cost of goods sold:

Beginning inventory

$13,000

$12,000

Net purchases

76,000

70,000

Cost of goods available

$89,000

$82,000

Ending inventory

(17,000)

(13,000)

Cost of goods sold

72,000

69,000

Gross profit

$ 67,000

$ 51,000

Operating expenses

23,000

18,000

Net income

$ 44,000

$ 33,000

During 2012, Great Foods discovered that ending 2011 inventory was overstated by $4,500.

Requirements

1. Prepare corrected income statements for the two years.

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

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