Question

DJFats Company determined that the 2019 ending inventory had been overstated by $11,200 AND that the 2019 beginning inventory was overstated by $6,600. Before the effect of these errors, 2019 pretax income had been computed as $108,000. What should be reported as the correct 2019 pretax income before taxes? 5 points: a. 103,400 b. 125,800 c. 114,600 d. 90,200 e. None of the above, the correct answer is:

Answer 1

Answer:

a. $103,400

Explanation:

As we know that

Cost of goods sold = Beginning inventory + purchases - ending inventory

And,  

Gross profit = Sales revenue - cost of goods sold

Since in the question it is given that

The ending inventory and beginning inventory had been overstated by $11,200 and $6,600 respectively

Since overstatement in the initial inventory raises the cost of the goods sold and decreases by that amount the gross profit & net income

And, overstatement in ending inventory reduced cost of goods sold and raised gross profit & net income by that amount.

So for overstated ending inventory the amount should be deducted and for overstated beginning inventory the condition would be reverse

So, the correct amount is

= incorrect pretax net income + overstatement in beginning inventory - overstatement in ending inventory

= $108,000 + $6,600 - $11,200

= $103,400