Question

The income statement for Pruitt Company summarized for a four-year period shows the following:
[The following information applies to the questions displayed below) The income statement for Pruitt Company summarized for a four-year period shows the following: 2017 2016 2018 2019 2,028,000 2,460.000 2,712,000 2,983,000 Sales revenue Cost of goods sold 1,486,000 1,616,000 1,766,000 2,094,000 542,000 889,000 Gross profit 844,000 946,000 532,000 Expenses 470,000 495,000 525,000 414,000 364,000 Pretax income 72,000 349.000 127,400 25,200 122150 144,900 46,800 226,850 226,850 236.600 Net income An audit revealed that in determining these amounts, the ending inventory for 2017 was overstated by $26,000. The company uses a periodic inventory system.

Answer 1

Formula sheet

Ending inventory affects the cost of goods sold and profit Gross Profit as follows Cost of goods sold Beginning Inventory+ Purchases- Ending Inventory Gross Profit = Sales revenue-cost of goods sold Thus as ending inventory increases cost of goods sold decrease and as cost of goods sold decreases gross profit increases. Since ending inventory was overstated by $26,000 in 2017 hence cost of goods sold would be understated by $26,000 in 2017 Also, beginning invetory in 2018 will be overstated which will overstate the cost of goods sold Thus cost of goods sold needs to be increased by $26000 in 2017 and cost of goods sold in 2018 should be decreased by $26,000 10 12 Income statement to reflect the correct amount will be as follows: 15 2019 2016 $2,028,000 $1,486,000 $542,000 $470,000 $72,000 $25,200 $46,800 2017 2018 $2,460,000 $2,712,000 $2,983,000 $1,642,000 $1,740,000 $2,094,000 Sales Revenue Cost of goods sold Gross Profit Expense:s Pretax Income Income Tax Expense (35% Net Income $818,000 $972,000 $889,000 -G16-G17 $495,000 $532,000$525 S323,000 $440,000 $364,000 -G18-G19 $113,050 | $154,000 | $127,400-G20*35% $209,950 $286,000 $236,600 G20-G21 Gross profit % is calculated using following formula: Gross profit 96 Gross Profit /Sales 29 Calculation of Gross Profit % before correction: 2019 2016 $2,028,000 $542,000 26.73% 2017 2018 Sales Revenue Gross Profit before correction Gross Profit % before correction $2,460,000 $2,712,000 $2,983,000 $844,000 $946,000 $889,000 34.31% 34.88%) 29.80%)-G32/G31 35 Calculation of Gross Profit % after correction: 2019 2016 $2,028,000 $542,000 26.73% 2017 2018 $2,460,000 $2,712,000 $2,983,000 Sales Revenue Gross Profit after correction Gross Profit % after correction 38 $818,000 $972,000 $889,000 G18 33.25% 35.84%) 29.80%)-G38/G37 Hence 2019 29.80%)-G33 29.80%)-G39 42 Gross Profit % before correction Gross Profit % after correction 2016 26.73% 26.73% 2017 34.31% 33.25% 2018 34.88% 35.84% Income tax Expense Without Correction With Correction $113,050E21 $154,000 F21 49 2017 122150 2018 144190

Ending inventory affects the cos Cost of goods sold Beginning In Gross Profit Sales revenue co Thus as ending inventory increas Since ending inventory was over Also, beginning invetory in 2018 Thus cost of goods sold needs to 12 Income statement to reflect the 2016 2028000 1486000 -D16-D17 470000 -D18-D19 :D20* 3596 D20-D21 2018 2712000 1766000-26000 F16-F17 532000 F18-F19 F20"35% F20-F21 15 2017 2019 Sales Revenue Cost of goods sold Gross Profit Expenses Pretax Income Income Tax Expense (35%) Net Income 2983000 -1616000+26000 -E16-E17 495000 -E18-E19 :E20" 35% -E20-E21 G16-G17 525000 -G18-G19 -620+3596 G20-G21 18 19 G16-G17 -G18-G19 -620*3596 G20-G21 25 26 Gross profit % is calculated using Gross profit 96-Gross Profit /Sal 29 Calculation of Gross Profit % bef 2016 2017 2018 2019 Sales Revenue Gross Profit before correction 542000 Gross Profit % before correction! D32/D31 2028000 2712000 2983000 -E32/E31 F32/F31 632/G31 G32/G31 Calculation of Gross Profit % afte 36 2016 2028000 -D18 2017 Sales Revenue Gross Profit after correction Gross Profit % after correction 2018 2712000 F18 F38/F37 2019 2983000 -G18 G38/G37 -E18 -G18 1:038/D37 -E38/E37 G38/G37 Hence 2016 Gross Profit % before correction|D33 Gross Profit % after correction 1-D 39 2017 2018 F33 F39 2019 G33 -G39 G33 G39 -E33 Income tax Ex Without Correction 122150 144190 With Correction 2017 2018 -F21 -F21