Question

Dallas Corporation prepared the following two income statements:

	First Quarter						Second Quarter
Sales Revenue				$	22,000					$	26,400
Cost of Goods Sold
Beginning Inventory	$	4,400					$	5,400
Purchases		8,400						13,400
Goods Available for Sale		12,800						18,800
Ending Inventory		5,400						10,400
Cost of Goods Sold					7,400						8,400
Gross Profit					14,600						18,000
Operating Expenses					6,400						7,400
Income from Operations				$	8,200					$	10,600

  

During the third quarter, the company’s internal auditors discovered that the ending inventory for the first quarter should have been $6,400. The ending inventory for the second quarter was correct.  

Required:

1. What effect would the error have on total Income from Operations for the two quarters combined?
2. What effect would the error have on Income from Operations for each of the two quarters?
3. Prepare corrected income statements for each quarter. Ignore income taxes.

Answer 1

Answer:

1. Effect of error on total Income from Operations for the two quarters combined

The effect is zero, because in First quarter due to increase in ending inventory value the Income from operations increases in First quarter but in Second quarter there is increase in opening inventory value which results in decrease in of Income from operations for second quarter.

So, the net effect is zero.

2. Effect of error on total Income from Operations for each of the two quarters

In First quarter there is an increase in ending inventory value - so the Income from operations increases

In Second quarter there is an increase in opening inventory value - so the Income from operations decreases.

3. Corrected income statements for each quarter

Revised Income statements