During the course of your examination of the financial statements of H Co., a new client, for the year ended December 31, 2006, you discover the following:
- Inventory at January 1, 2006, had been overstated by $3,000.
- Inventory at December 31, 2006, was understated by $5,000.
- An insurance policy covering three years had been purchased on January 2, 2005, for $1,500. The entire amount was charged as an expense in 2005.
During 2006 the company received a $1,000 cash advance from a customer for merchandise to be manufactured and shipped during 2007. The $1,000 had been credited to sales revenues. The company’s gross profit on sales is 50%.
Net income reported on the 2006 income statement (before reflecting any adjustments for the above items) is $20,000.
The proper net income for 2006 is
- $26,500
- $23,500
- $16,500
- $20,500