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Question:Empire State Carpets’s books show the following data. In early 2020, auditors foundthat the ending merchandise inventory for 2017 was understated by \(8,000 and thatthe ending merchandise inventory for 2019 was overstated by \)9,000. The ending merchandiseinventory at December 31, 2018, was correct.

	2019	2018	2017
Net Sales Revenue	\( 220,000	\) 162,000	\( 176,000
Cost of Goods Sold:
Beginning Merchandise Inventory	\)22,000	\(29,000	\)46,000
Net cost of purchase	132,000	90,000	76,000
Cost of goods available for sale	154,000	119,000	122,000
Less: Ending Merchandise Inventory	32,000	22,000	29,000
Cost of goods sold	122,000	97,000	93,000
Gross Profit	98,000	65,000	83,000
Operating Expenses	72,000	38,000	48,000
Net Income	\( 26,000	\) 27,000	$ 35,000

Requirements

2. State whether each year’s net income—before your corrections—is understated oroverstated, and indicate the amount of the understatement or overstatement.

Step by step solution

01

Comparative income statement before and after correction

	2019	2018	2017
	Before correction	After Correction	Before correction	After Correction	Before correction	After Correction
Net Sales Revenue	$220,000	$220,000	$162,000	$162,000	$176,000	$176,000
Cost of Goods Sold:
Beginning Merchandise Inventory	$22,000	$22,000	$29,000	$37,000	$46,000	$46,000
Net cost of purchase	132,000	132,000	90,000	90,000	76,000	76,000
Cost of goods available for sale	154,000	154,000	119,000	127,000	122,000	122,000
Less: Ending Merchandise Inventory	32,000	23,000	22,000	22,000	29,000	37,000
Cost of goods sold	122,000	131,000	97,000	105,000	93,000	85,000
Gross Profit	98,000	89,000	65,000	57,000	83,000	91,000
Operating Expenses	72,000	72,000	38,000	38,000	48,000	48,000
Net Income	$ 26,000	$ 17,000	$ 27,000	$ 19,000	$ 35,000	$ 43,000

02

Ney income before and after correction

Net income in 2017

In 2017 net income before the correction was $35,000 and after the correction, it was $43,000. So the net income in 2017 has been understated by$8,000.

Net income in 2018

In 2018 net income before the correction was $27,000 and after the correction, it was $19,000. So the net income in 2018 has been overstated by$8,000.

Net income in 2019

In 2019 net income before the correction was $26,000 and after the correction, it was $17,000. So the net income in 2019 has been understated by$9,000.

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