Grants Corporation prepared the tolowing two income statements (simplitied for i

Question

Grants Corporation prepared the tolowing two income statements (simplitied for ilustrative purposes) First Quarter $ 12,300 19,800 Sales revenue Cost of goods sold Beginning inventory Purchases Goods available for sale Ending inventory Cost of goods sold Gross profit Expenses Pretax income $ 3,900 2.800 6,700 3,500 3,500 12,700 16,200 9,700 6,500 13,300 5,000 S 8,300 3 200 9.100 4.100 S 5,000 During the third quarter, it was discovered that the ending inventory for the first quarter should have been $4,050 Required 1. What effect did this error have on the combined pretax income of the two quarters? O Increase by $550 Decrease by $550 O No effect 2. Which quarters (if any) EPS amount were affected by this error? First Quarter only Second Quarter only Both quarters Neither quarter 3. Prepare corrected income statements for each quarter First Quarter Second Quarter Cost of goods sold Goods available for sale Cost of goods sold

Explanation / Answer

Part 1 - No Effect

There is Difference of $550 ($4050 - $3500) in inventory

In First Quarter inventory is understated by $550 which will increase the profit of first quarter by $550.

Such Inventory would be beginning inventory of second quarter. Increase in beginning inventory would lower donlwn profits of second quarter by $550

Part 2 - Both Quarters

Since profit of both quarteres has been changed. It will change EPS of Both Quarters

Part 3 Income Statement

Part 4 - Comparable effect on Income Statement

Particulars First Quarter First Quarter Second Quarter Second Quarter Sales Revenue $12300 $19800 Less : Cost of goods sold Beginning Inventory $3900 $4050 Purchases $2800 $12700 Goods available for sale $6700 $16750 Ending Inventory $4050 $9700 Cost of Goods sold $2650 $7050 Gross Profit $9650 $12750 Less : Expenses $4100 $5000 Pre Tax Income $5550 $7750

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