Analyzing and Interpreting the Impact of an Inventory Error
Grants Corporation prepared the following two income statements (simplified for illustrative purposes):
| First Quarter 2011 | Second Quarter 2011 | ||
Sales revenue |
| $11,000 |
| $18,000 |
Cost of goods sold |
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Beginning inventory | $4,000 |
| $3,800 |
|
Purchases | 3,000 |
| 13,000 |
|
Goods available for sale | 7,000 |
| 16.800 |
|
Ending inventory | 3,800 |
| 9,000 |
|
Cost of goods sold |
| 3,200 |
| 7,800 |
Gross profit |
| 7,800 |
| 10,200 |
Expenses |
| 5,000 |
| 6,000 |
Pretax income |
| $2,800 |
| $4,200 |
During the third quarter, it was discovered that the ending inventory for the first quarter should have been $4,400.
Required:
1. What effect did this error have on the combined pretax income of the two quarters? Explain.
2. Did this error affect the EPS amounts for each quarter? (See Chapter 5 for discussion of EPS.) Explain.
3. Prepare corrected income statements for each quarter.
4. Set up a schedule with the following headings to reflect the comparative effects of the correct and incorrect amounts on the income statement:
| 1st Quarter | 2nd Quarter | ||||
Income Statement Item | Incorrect | Correct | Error | Incorrect | Correct | Error |
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