Nature Foods Grocery reported the following comparative income statements for the years ended June 30, 2019 and 2018:

NATURE FOODS GROCERY
Income Statements
Years Ended June 30, 2019 and 2018
	2019	2018
Net Sales Revenue	\( 134,000	\) 119,000
Cost of Goods Sold:
Beginning Merchandise Inventory	\(17,000	\)14,000
Net Cost of Purchases	78,000	67,000
Cost of Goods Available for Sale	95,000	81,000
Less: Ending Merchandise Inventory	18,000	17,000
Cost of Goods Sold	77,000	64,000
Gross Profit	57,000	55,000
Operating Expenses	26,000	21,000
Net Income	\( 31,000	\) 34,000

During 2019, Nature Foods Grocery discovered that ending 2018 merchandise inventory was overstated by $5,500.

Requirements

2. State whether each year’s net income—before your corrections—is understated or overstated, and indicate the amount of the understatement or overstatement.

Step by step solution

01

Step-by-Step-SolutionStep 1: Net Income for 2018

Net income for 2018 before correction is $34,000.

But after the correction, the net income amounts to $28,500.

So the net income before the correction was overstated. $$\begin{gathered} \mathit{O}\mathit{v}\mathit{e}\mathit{r}\mathit{s}\mathit{t}\mathit{a}\mathit{t}\mathit{e}\mathit{d}\mathit{a}\mathit{m}\mathit{o}\mathit{u}\mathit{n}\mathit{t}\mathit{o}\mathit{f}\mathit{n}\mathit{e}\mathit{t}\mathit{i}\mathit{n}\mathit{c}\mathit{o}\mathit{m}\mathit{e}\mathit{b}\mathit{e}\mathit{f}\mathit{o}\mathit{r}\mathit{e}\mathit{c}\mathit{o}\mathit{r}\mathit{r}\mathit{e}\mathit{c}\mathit{t}\mathit{i}\mathit{o}\mathit{n}\mathbf{=}\mathit{N}\mathit{e}\mathit{t}\mathit{I}\mathit{n}\mathit{c}\mathit{o}\mathit{m}\mathit{e}\mathit{b}\mathit{e}\mathit{f}\mathit{o}\mathit{r}\mathit{e}\mathit{c}\mathit{o}\mathit{r}\mathit{r}\mathit{e}\mathit{c}\mathit{t}\mathit{i}\mathit{o}\mathit{n}\mathbf{-}\mathit{N}\mathit{e}\mathit{t}\mathit{I}\mathit{n}\mathit{c}\mathit{o}\mathit{m}\mathit{e}\mathit{a}\mathit{f}\mathit{t}\mathit{e}\mathit{r}\mathit{c}\mathit{o}\mathit{r}\mathit{r}\mathit{e}\mathit{c}\mathit{t}\mathit{i}\mathit{o}\mathit{n} \\ \mathbf{=}\mathbf{\$}\mathbf{34}\mathbf{,}\mathbf{000}\mathbf{-}\mathbf{\$}\mathbf{28}\mathbf{,}\mathbf{500} \\ \mathbf{=}\mathbf{\$}\mathbf{5}\mathbf{,}\mathbf{500} \end{gathered}$$

02

Net Income for 2019

Net income for 2019 before correction is $31,000.

But after the correction, the net income amounts to $36,500.

So the net income before the correction was understated.$$\begin{gathered} \mathit{U}\mathit{n}\mathit{d}\mathit{e}\mathit{r}\mathit{s}\mathit{t}\mathit{a}\mathit{t}\mathit{e}\mathit{d}\mathit{a}\mathit{m}\mathit{o}\mathit{u}\mathit{n}\mathit{t}\mathit{o}\mathit{f}\mathit{n}\mathit{e}\mathit{t}\mathit{i}\mathit{n}\mathit{c}\mathit{o}\mathit{m}\mathit{e}\mathit{b}\mathit{e}\mathit{f}\mathit{o}\mathit{r}\mathit{e}\mathit{c}\mathit{o}\mathit{r}\mathit{r}\mathit{e}\mathit{c}\mathit{t}\mathit{i}\mathit{o}\mathit{n}\mathbf{=}\mathit{N}\mathit{e}\mathit{t}\mathit{I}\mathit{n}\mathit{c}\mathit{o}\mathit{m}\mathit{e}\mathit{a}\mathit{f}\mathit{t}\mathit{e}\mathit{r}\mathit{c}\mathit{o}\mathit{r}\mathit{r}\mathit{e}\mathit{c}\mathit{t}\mathit{i}\mathit{o}\mathit{n}\mathbf{-}\mathit{N}\mathit{e}\mathit{t}\mathit{I}\mathit{n}\mathit{c}\mathit{o}\mathit{m}\mathit{e}\mathit{b}\mathit{e}\mathit{f}\mathit{o}\mathit{r}\mathit{e}\mathit{c}\mathit{o}\mathit{r}\mathit{r}\mathit{e}\mathit{c}\mathit{t}\mathit{i}\mathit{o}\mathit{n} \\ \mathbf{=}\mathbf{\$}\mathbf{36}\mathbf{,}\mathbf{500}\mathbf{-}\mathbf{\$}\mathbf{31}\mathbf{,}\mathbf{000} \\ \mathbf{=}\mathbf{\$}\mathbf{5}\mathbf{,}\mathbf{500} \end{gathered}$$

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