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
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$13,000
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$12,000
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Net purchases
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76,000
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70,000
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Cost of goods available
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$89,000
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$82,000
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Ending inventory
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(17,000)
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(13,000)
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Cost of goods sold
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72,000
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69,000
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Gross profit
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$ 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.