Chapter 6, Problem E6.24E

Correcting an inventory error-two years

Learning Objective 5

1. 2019, NI $36,500

Nature Foods Grocery reported the following comparative income statements for the years ended June 30, 2019 and 2018:

NATURE FOODS GROCERY

Income Statements

Years Ended June 30, 2019 and 2018 Net Sales Revenue $ 134,000 $ 119,000 Cost of Goods Sold: Beginning Merchandise Inventory $ 17,000 $ 14,000 Net Cost of Purchases 78,000 67,000 Cost of Goods Available for Sale 95,000 81,000 Less Ending Merchandise Inventory 18,000 17,000 Cost of Goods Sold 77,000 64,000 Gross Profit 57,000 55,000 Operating Expenses 26,000 21,000 Net Income $ 31,000 $ 34,000

During 2019, Nature Foods Grocery discovered that ending 2018 merchandise inventory was overstated by $5,500.

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.