E7-19 (Algo) Analyzing and Interpreting the Impact of an Inventory Error LO7-7

Grants Corporation prepared the following two income statements (simplified for illustrative purposes):

	First Quarter						Second Quarter
Sales revenue			$	11,400							$	19,600
Cost of goods sold
Beginning inventory	$ 4,000						$	3,600
Purchases	3,400							12,200
Goods available for sale	7,400							15,800
Ending inventory	3,600							10,000
Cost of goods sold				3,800								5,800
Gross profit				7,600								13,800
Expenses				4,500								5,600
Pretax income			$	3,100							$	8,200

During the third quarter, it was discovered that the ending inventory for the first quarter should have been $4,190.

Required:

1. What effect did this error have on the combined pretax income of the two quarters?

2. Which quarter's or quarters' (if any) EPS amounts were affected by this error?

3. Prepare corrected income statements for each quarter.

4. Prepare the schedule to reflect the comparative effects of the correct and incorrect amounts on the income statement.

1. What effect did this error have on the combined pretax income of the two quarters?

2. Which quarter's or quarters' (if any) EPS amounts were affected by this error?

1.	Effect on combined pretax income
2.	Quarter(s)

3. Prepare corrected income statements for each quarter.

	First Quarter		Second Quarter
Sales revenue		$11,400		$19,600
Cost of goods sold:
Beginning inventory	$4,000
Purchases	3,400		12,200
Goods available for sale	7,400		12,200
Ending inventory
Cost of goods sold
Gross profit
Expenses
Pretax income

4.Prepare the schedule to reflect the comparative effects of the correct and incorrect amounts on the income statement.

	1st Quarter				2nd Quarter
	Incorrect	Correct	Error		Incorrect	Correct	Error
Beginning inventory	$4,000	$4,000	No error
Ending inventory					10,000	10,000	No error
Cost of goods sold
Gross profit
Pretax income