Reference no: EM13527392

 

Correcting an inventory error-two years

Great Foods Grocery reported the following comparative income statement for the years ended June 30, 2012 and 2011:

GREAT FOODS GROCERY Income Statements Years Ended June 30, 2012 and 2011
	2012		2011
Sales revenue		$ 139,000		$ 120,000
Cost of goods sold:
Beginning inventory	$13,000		$12,000
Net purchases	76,000		70,000
Cost of goods available	$89,000		$82,000
Ending inventory	(17,000)		(13,000)
Cost of goods sold		72,000		69,000
Gross profit		$ 67,000		$ 51,000
Operating expenses		23,000		18,000
Net income		$ 44,000		$ 33,000

During 2012, Great Foods discovered that ending 2011 inventory was overstated by $4,500.

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.