Question

Check my work Following are condensed income statements for Uncle Bill's Home Improvement Center for the years ended December 31, 2020 and 2019 Sales Cost of goods sold Gross profit Operating expenses Net income (ignoring income taxes) 2020 $ 811,800 (606,980) $ 284,900 (155,550) $ 49,350 2019 $ 785,400 (540,600) $ 244,800 (142,050) $ 102,750 Uncle Bill was concerned about the operating results for 2020 and asked his recently hired accountant, "If sales increased in 2020 why was net income less than half of what it was in 2019?" In February of 2021, Uncle Bill got his answer: "The ending inventory reported in 2019 was overstated by $35,250 for merchandise that we were holding on consignment on behalf of Kirk's Servistar. We still keep some of their appliances in stock, but the value of these items was not included in the 2020 inventory count because we don't own them." Required: a. Recast the 2019 and 2020 income statements to take into account the correction of the 2019 ending inventory error. 2020 811.800 2019 785.400 Sales $

Answer 1

As the ending inventory of 2019 is overstated, it means opening inventory in 2020 is also overstated, therefore in order to correct the error ending inventory of 2019 and opening inventory of 2020 should be reduced by 35,250. As a result, cost of goods sold of 2019 will be 540,600 + 35,250 = 575,850. Cost of goods sold of 2020 will be 606,900 - 35,250 = 571,650. The re stated income statement is as follows,

Particulars	2020	2019
Sales	811,800	785,400
Cost of goods sold	(571,650)	(575,850)
Gross profit	240,150	209,550
Operating expenses	(155,550)	(142,050)
Net income (ignoring taxes)	84,600	67,500

Comparision of net income before and after correction of error,

Combined net income	Total	2020	2019
Before correction of error	152,100	49,350	102,750
After correction of error	152,100	84,600	67,500