During the audit of Montane Company's 2014 financial statements, the auditors discovered that the 2014 ending inventory had been overstated by $8,000 and that the 2014 beginning inventory was overstated by $5,000. Before the effect of these errors, 2014 pretax income had been computed as $100,000. What should be reported as the correct 2014 pretax income before taxes?

Question

Quizplus · Accepted Answer

The ending inventory overstatement of $8,000 would decrease cost of goods sold and increase pretax income by the same amount. The beginning inventory overstatement of $5,000 would increase cost of goods sold and decrease pretax income by the same amount. Therefore, the net effect of these errors on pretax income is an increase of $3,000 ($8,000 − $5,000). The correct pretax income before taxes for 2014 is $103,000 ($100,000 + $3,000).

During the Audit of Montane Company's 2014 Financial Statements, the Auditors