Charles Scrab Inc has beginning inventory of $15,000, purchases of $25,000, and ending inventory of $10,000, sales of $75,000, operating expenses of $30,000, and a tax rate of 40% for 2010. An accounting clerk input the ending inventory as $12,000. What is the effect on 2011 net income?

Question

Quizplus · Accepted Answer

The ending inventory error of $2,000 ($12,000 - $10,000) will cause cost of goods sold to be understated by $2,000, which increases gross profit by $2,000. This, in turn, increases net income by $1,200 ($2,000 x 60%, the tax rate) in 2010. However, in 2011, when the error is corrected, cost of goods sold will be overstated by $2,000, therefore reducing gross profit by $2,000, and net income by $1,200 ($2,000 x 60%, the tax rate). Thus, net income for 2011 will be $1,200 lower than 2010.

Charles Scrab Inc Has Beginning Inventory of $15,000, Purchases of $25,000