Wendy Co.made the following errors in 2010: -Ending inventory was overstated by $ \$ 2,000 $.
-Beginning inventory was understated by $ \$ 6,000 $
-Purchaseswere overstated by $ \$ 3,000 $.
Reported net income was $15, 000.The correct 2010 net income was
A)$26, 000
B)$20, 000
C)$10, 000
D)$ 4, 000

Question

Wendy Co.made the following errors in 2010: -Ending inventory was overstated by $ \$ 2,000 $. 
-Beginning inventory was understated by $ \$ 6,000 $
-Purchaseswere overstated by $ \$ 3,000 $.
 Reported net income was $15, 000.The correct 2010 net income was
A)$26, 000
B)$20, 000
C)$10, 000
D)$ 4, 000

Quizplus · Accepted Answer

The error is reported net income was $15,000, which is incorrect. Therefore, we need to determine the correct net income. As no information is given about what caused the error, we cannot simply assume that the reported net income is off by a certain percentage or amount. Therefore, we need to find another starting point to determine the correct net income. One option is to look at the financial statements and see if any other information is given that would allow us to calculate the net income. For example, we could look at the income statement and see what the gross profit or operating income is, and then subtract any expenses to arrive at the net income. Alternatively, we could look at the cash flow statement and see what the cash flow from operations is, and then adjust for any non-cash items (such as depreciation) to arrive at the net income. Without any further information, we cannot say exactly what the correct net income is, but we can rule out choices A, B, and D since they all assume a specific amount for the correct net income, which is not supported by the information given. Therefore, the best choice is C, which acknowledges that we do not have enough information to determine the correct net income and that any specific amount would be pure speculation.

Wendy CoMade the Following Errors in 2010: -Ending Inventory Was Overstated