1. Prepare corrected income statements for the three 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. 3. Compute the inventory, turnover and days sales in inventory using the correct income statement for the three years. round to two decimals. **Data Table**This data table presents financial figures for Harmony Carpets over the years 2023, 2024, and 2025. These figures are used for analyzing the company's financial performance, specifically focusing on aspects of net sales revenue, cost of goods sold, gross profit, and net income.### 2023- **Net Sales Revenue**: $181,000- **Cost of Goods Sold** - **Beginning Merchandise Inventory**: $33,000 - **Plus Net Cost of Inventory Purchased**: $90,000 - **Cost of Goods Available for Sale**: $123,000 - **Less Ending Merchandise Inventory**: $20,000 - **Cost of Goods Sold**: $103,000- **Gross Profit**: $78,000- **Operating Expenses**: $46,000- **Net Income**: $32,000### 2024- **Net Sales Revenue**: $167,000- **Cost of Goods Sold** - **Beginning Merchandise Inventory**: $39,000 - **Plus Net Cost of Inventory Purchased**: $101,000 - **Cost of Goods Available for Sale**: $140,000 - **Less Ending Merchandise Inventory**: $16,000 - **Cost of Goods Sold**: $124,000- **Gross Profit**: $43,000- **Operating Expenses**: $53,000- **Net Income**: $28,000### 2025- **Net Sales Revenue**: $210,000- **Cost of Goods Sold** - **Beginning Merchandise Inventory**: $29,000 - **Plus Net Cost of Inventory Purchased**: $153,000 - **Cost of Goods Available for Sale**: $182,000 - **Less Ending Merchandise Inventory**: $28,000 - **Cost of Goods Sold**: $125,000- **Gross Profit**: $85,000- **Operating Expenses**: $55,000- **Net Income**: $30,000### Analysis Insights- **Gross Profit and Net Income**: The data indicates fluctuations in gross profit and net income over the three years, with a noticeable increase in gross profit in 2025 compared to the prior years.- **Operating

Answered: 1. Prepare corrected income statements…

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Question

1. Prepare corrected income statements for the three 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. 3. Compute the inventory, turnover and days sales in inventory using the correct income statement for the three years. round to two decimals.

**Data Table**

This data table presents financial figures for Harmony Carpets over the years 2023, 2024, and 2025. These figures are used for analyzing the company's financial performance, specifically focusing on aspects of net sales revenue, cost of goods sold, gross profit, and net income.

### 2023
- **Net Sales Revenue**: $181,000
- **Cost of Goods Sold**
- **Beginning Merchandise Inventory**: $33,000
- **Plus Net Cost of Inventory Purchased**: $90,000
- **Cost of Goods Available for Sale**: $123,000
- **Less Ending Merchandise Inventory**: $20,000
- **Cost of Goods Sold**: $103,000
- **Gross Profit**: $78,000
- **Operating Expenses**: $46,000
- **Net Income**: $32,000

### 2024
- **Net Sales Revenue**: $167,000
- **Cost of Goods Sold**
- **Beginning Merchandise Inventory**: $39,000
- **Plus Net Cost of Inventory Purchased**: $101,000
- **Cost of Goods Available for Sale**: $140,000
- **Less Ending Merchandise Inventory**: $16,000
- **Cost of Goods Sold**: $124,000
- **Gross Profit**: $43,000
- **Operating Expenses**: $53,000
- **Net Income**: $28,000

### 2025
- **Net Sales Revenue**: $210,000
- **Cost of Goods Sold**
- **Beginning Merchandise Inventory**: $29,000
- **Plus Net Cost of Inventory Purchased**: $153,000
- **Cost of Goods Available for Sale**: $182,000
- **Less Ending Merchandise Inventory**: $28,000
- **Cost of Goods Sold**: $125,000
- **Gross Profit**: $85,000
- **Operating Expenses**: $55,000
- **Net Income**: $30,000

### Analysis Insights
- **Gross Profit and Net Income**: The data indicates fluctuations in gross profit and net income over the three years, with a noticeable increase in gross profit in 2025 compared to the prior years.
- **Operating

Expert Solution

Step 1 Effect of over and understatement of inventory

Opening Inventory - Overstatement of opening inventory reduces the net income of the current year and raises the net income in the subsequent year. Understatement of opening inventory raises the net income of the current year and reduces the net income of subsequent year.

Closing Inventory - Overstatement of closing stock raises the net income of the current year and reduces the net income of subsequent year. Understatement of closing stock reduces the net income of current year and increases the net income of subsequent year.

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