Correcting an inventory error—two years Great Foods Grocery reported the following comparative income statement for the years ended June 30, 2012 and 2011:
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GREAT FOODS GROCERY Income Statements Years Ended June 30, 2012 and 2011 |
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2012 |
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2011 |
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Sales revenue |
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$ 139,000 |
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$ 120,000 |
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Cost of goods sold: |
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Beginning inventory |
$13,000 |
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$12,000 |
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Net purchases |
76,000 |
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70,000 |
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Cost of goods available |
$89,000 |
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$82,000 |
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Ending inventory |
(17,000) |
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(13,000) |
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Cost of goods sold |
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72,000 |
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69,000 |
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Gross profit |
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$ 67,000 |
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$ 51,000 |
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Operating expenses |
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23,000 |
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18,000 |
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Net income |
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$44,000 |
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$ 33,000 |
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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.