JP Corporation had net income of $1,000,000 for 2013. After issuing its financial statements, the company realized that it had failed to include inventory from one of its small warehouses for several years. Specifically, it forgot to include $20,000 on December 31, 2012 and $30,000 on December 31, 2013. Which of the following is true regarding JP's 2011 net income?
A)Net income was understated by $10,000.
B)Net income was overstated by $10,000.
C)Net income was understated by $30,000.
D)Net income was overstated by $30,000.

Question

Quizplus · Accepted Answer

The $20,000 inventory omission on December 31, 2012, means that the ending inventory for 2011 was understated by $20,000. Since ending inventory of one year becomes the beginning inventory of the next, the beginning inventory for 2012 was also understated by $20,000. This understatement in beginning inventory for 2012 would have caused the cost of goods sold for 2012 to be understated, leading to an overstatement of net income for 2012 by $20,000. However, the question asks about 2011 net income, which would have been understated by $10,000 due to the $20,000 understatement in ending inventory, affecting the cost of goods sold calculation for 2011.

JP Corporation Had Net Income of $1,000,000 for 2013