The correct net income for Sarah Corp. was $53,500. However, the company reported incorrect net income because beginning inventory was understated by $2,500, purchases were overstated by $2,000, and ending inventory was overstated by $2,000. What net income did Sarah Corp. report?

Question

Quizplus · Accepted Answer

The correct net income was $53,500. The errors in inventory and purchases affect the cost of goods sold (COGS) calculation. Beginning inventory being understated by $2,500 would increase COGS, reducing net income. Purchases being overstated by $2,000 would also increase COGS, further reducing net income. Ending inventory being overstated by $2,000 would decrease COGS, increasing net income. Correcting these errors: decrease COGS by $2,500 (beginning inventory) + $2,000 (ending inventory) = $4,500, and increase COGS by $2,000 (purchases), net effect = decrease in COGS by $2,500. Therefore, the reported net income was $53,500 + $2,500 = $56,000.

The Correct Net Income for Sarah Corp