1. Inventory errors and income measurement. The income statements of Keagle Comp
ID: 2488150 • Letter: 1
Question
1. Inventory errors and income measurement. The income statements of Keagle Company for 20X3 and 20X4 follow.
20X3 20X4
Sales $100,000 $109,000
Cost of goods sold $62,000 $74,000
Gross profit $38,000 $35,000
Expenses $26,000 $22,000
Net Income $12,000 $13,000
A recent review of the accounting records discovered that the 20X3 ending inventory had been understated by $4,000. a. Prepare corrected 20X3 and 20X4 income statements. b. What is the effect of the error on ending owner’s equity for 20X3 and 20X4?
Explanation / Answer
Cost of goods sold = Opening inventory + Purchases - Closing Inventory
So if the ending stock of 20X3 is understated by $4000 then cost of goods sold will be less by $4000 in 20X3.(as the clsoing stock is negative item in equation). The clsing stock of 20X3 is the opening stock of 20X4. so the cost of goods sold will be more in 20X4 (as the opening stock is positive item in equation).
After considering this the profits in 20X3 will be more and in 20X4 is less by $4000
20X3 20X4 Sales 100000 109000 Cost of goods sold 58000 78000 Gross profit 42000 31000 Expense 26000 22000 Net income 16000 9000Related Questions
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