The records of James Company show the following data:

After its July 31, 2014, year end, James discovered two errors:
1. In August 2012, James recorded a $30,000 inventory purchase on account for goods that had been received in July 2012. The physical inventory account correctly included this inventory, and $70,000 is the correct amount of inventory at July 31, 2012.
2. Ending inventory in 2013 was overstated by $20,000. James included goods held on consignment for another company in its physical count.
Instructions
(a) Prepare incorrect and corrected income statements for the years ended July 31, 2012, 2013, and 2014.
(b) What is the combined effect of the errors on owner's equity at July 31, 2014, before correction?
(c) Calculate the incorrect and correct inventory turnover ratios for each of the years 2013 and 2014.
Taking It Further
Compare the trends in the incorrectly calculated annual profits with the trends in the correctly calculated annual profits. Does it appear that management may have deliberately made these errors, or do they appear to be honest errors? Explain.

Transcribed Image Text:

2014 2013 2012 Income statement: Sales Cost of goods sold Operating expenses $648,000 540,000 100,000 $624,000 510,000 100,000 $600,000 480,000 100,000 Balance sheet: Merchandise inventorv 40,000 60,000 70,000