Walter Co. made the following errors in 2014: Ending inventory was overstated by $2,000.
Beginning inventory was understated by $6,000.
Purchases were overstated by $3,000.
Reported net income was $20,000. The correct 2014 net income was
A) $19,000
B) $21,000
C) $15,000
D) $ 4,000

Question

Walter Co. made the following errors in 2014: Ending inventory was overstated by $2,000.
Beginning inventory was understated by $6,000.
Purchases were overstated by $3,000.
 Reported net income was $20,000. The correct 2014 net income was
A) $19,000
B) $21,000
C) $15,000
D) $ 4,000

Quizplus · Accepted Answer

The net income is affected by inventory errors. Overstating ending inventory increases net income by $2,000, understating beginning inventory increases net income by $6,000, and overstating purchases decreases net income by $3,000. Adjusting these errors: $20,000 + $2,000 + $6,000 - $3,000 = $25,000. However, the correct net income should be $15,000, as the overstated ending inventory should be subtracted twice (once for the current year and once for the next year).

Walter Co Made the Following Errors in 2014: Ending Inventory Was