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

1. Prepare corrected income statements for the three years.

Short answer

Correct figures for 2017, 2018, and 2019 -

	2017	2018	2019
Opening Inventory	-	$36,000	-
Ending Inventory	$36,000	-	$25,000
COGS	$91,000	$114,000	$128,000
Gross Profit	$79,000	$47,000	$84,000
Net Income	$40,000	$19,000	$21,000

Step-by-step solution

Step-by-Step-SolutionStep1: Cost of goods sold

The cost of goods sold is the direct expenses incurred in respect of materials for producing goods. It is computed by taking the opening stock and purchase of material as available inventory and adjusting it for closing stock.

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	$ 212,000	$ 161,000	$ 170,000
Cost of Goods Sold:
Beginning Merchandise Inventory	$22,000	$36,000	$41,000
Net cost of purchase	131,000	100,000	86,000
Cost of goods available for sale	153,000	136,000	127,000
Less: Ending Merchandise Inventory	25,000	22,000	36,000
Cost of goods sold	128,000	114,000	91,000
Gross Profit	84,000	47,000	79,000
Operating Expenses	63,000	28,000	39,000
Net Income	$ 21,000	$ 19,000	$ 40,000

Explanation for the above income statement

The income statement above has been corrected by making the ending inventory for 2017 correct first. This correction has made the ending inventory for 2017 amount to $36,000. 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.