Question

Nova Scotia Emporium has been in business for 5 years. Due to a lack of understanding of generally accepted accounting principles, errors were made in calculating the amount at which to report inventory on the balance sheet at the end of the fiscal year. These errors are summarized below:

Annual Net Income Reported in Income

Year Statement    Description and Amount of Error in Ending Inventory 2020 $ 202,000 Understatement $ 20,000 2021 $ 110,595 Understatement $ 40,000 2022 $ 97,500 Overstatement $ 15,000 2023 $ 150,000 Understatement    $ 5,000 2024 $ 210,000 Overstatement $ 26,000

Required:

Calculate the corrected net income amounts for each of the 5 years

Answer 1

Calculation of corrected net income amounts for each of the 5 years:

Nova Scotia Emporium
All amounts in '$'
Year	Annual Net Income (A)	Amount of error in ending Inventory (B)	Description of Error in Inventory	Corrected Net Inome	Calculation
2020	202,000	20,000	Understatement	222,000	A+B
2021	110,595	40,000	Understatement	150,595	A+B
2022	97,500	15,000	Overstatement	82,500	A-B
2023	150,000	5,000	Understatement	155,000	A+B
2024	210,000	26,000	Overstatement	184,000	A-B

Note 1 : If Inventory is Understated at the end of year, Cost of Goold sold is Overstated, Hence the Net Income for the year is also Understated, Hence Understated amount is added in Net Income.

Note 2 : If Inventory is Overstated at the end of year, Cost of Goods sold is Understated, Hence the net Income for the year is also Onderstated.Hence Overstated amount is deducted from Net Income.