Sara Cloud established Sara's Boutique in January 19X4 to import woolens from Scotland. During 19X4 and 19X5 Cloud kept the company's books and prepared the financial statements, although she had no training or experience in accounting. As a result, the accounts contain numerous errors. Cloud recorded revenue from sales on the collection method, which is not appropriate for the company. She should have been using the sales method for revenues. She also recorded inventory purchases as the cost of goods sold.

When the value of the store building increased by \(\$ 50,000\) in \(19 \times 6\), Cloud recorded an increase in the Building account and credited Revenue. On January 2, 19X4, she borrowed \(\$ 30,000\) on a 9 -percent, three-year note. She intended to wait until \(19 \times 7\), when the note was due, to record the full amount of interest expense for three years. The company's records reveal the following:

\section*{Required}
1. In early 19X7 Cloud employed you as an accountant. Apply the concepts and principles of GAAP to compute the correct net income of Sara's Boutique for 19X4, 19X5, and 19X6.
2. How will what you learned in this problem help you manage a business?

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Reported net income (net loss). Sales. Cash collections from customers. 19X4 $(19,200) 19X5 19X6 $ 48,600 $ 72,100 256,700 303,500 366,800 210,400 309,000 317,800 Purchases of inventory. 141,000 187,400 202,300 Ending inventory.. 35,800 59,900 73,400 Accrued expenses not recorded at year end; these expenses were recorded during the next year, when paid. 13,500 22,600 30,100 Interest expense recorded... -0- -0- -0- Revenue recorded for increase in the value of the store building........... 50,000