Question

Following are condensed income statements for Uncle Bill's Home Improvement Center for the years ended December 31, 2017, and 2016: 2017 2016 Sales $ 487,080 $ 471,240 Cost of goods sold (364,140 ) (324,360 ) Gross profit $ 122,940 $ 146,880 Operating expenses (93,330 ) (85,230 ) Net income (ignoring income taxes) $ 29,610 $ 61,650 Uncle Bill was concerned about the operating results for 2017 and asked his recently hired accountant, "If sales increased in 2017, why was net income less than half of what it was in 2016?" In February of 2018, Uncle Bill got his answer: "The ending inventory reported in 2016 was overstated by $21,150 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 2017 inventory count because we don't own them." Required: a. Recast the 2016 and 2017 income statements to take into account the correction of the 2016 ending inventory error

Answer 1

a) Recasting of the Income statement:
year	2017	2017	2016	2016
	Calculation	AMOUNT	Calculation	AMOUNT
Sales		487080		471240
Cost of Goods Sold	(-364140+21150)	-342990	(-324360-21150)	-345510
Gross Profit		144090		125730
Operating expenses		-93330		-85230
Net Income (ignoring Income tax)		50760		40500
The goods on consignment are sold out and waiting for delivery, so should not be included
in stock, thus non-inclusion of the consignment goods worth $21150 will increase the COGS
in the year 2016 and decreases the COGS in 2017.