E7-19 (Algo) Analyzing and Interpreting the Impact of an Inventory Error L07-7 Grants Corporation prepared the following two income statements (simplified for illustrative purposes): First Quarter $ 12,500 Second Quarter $19,300 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 3,400 7,300 3,100 $ 3,100 12,100 15,200 9,700 4,200 8,300 4,600 3,700 5,500 13,800 5,300 $ 8,500 $ During the third quarter, it was discovered that the ending inventory for the first quarter should have been $3,500. 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. Req 1 and 2 Req3 Reg 4 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) No effect Both Req 1 and 2 Req3 > Req 1 and 2 Req3 Req 4 Prepare corrected income statements for each quarter. First Quarter Second Quarter Cost of goods sold: Goods available for sale Cost of goods sold Req 1 and 2 Req3 Reg 4 Prepare the schedule to reflect the comparative effects of the correct and incorrect amounts on the income statement. 1st Quarter Correct $ 3,900 2nd Quarter Correct Incorrect Incorrect $ 3,900 Error Error No error 9,700 9,700 No error Beginning inventory Ending inventory Cost of goods sold Gross profit Pretax income