Question

The following inventory valuation errors have been discovered for Knox Corporation:

Answer 1

Answer:

Corrected Income before taxes are $115,000 (2015), $315,000 (2016) and $185,000 (2017)

Explanation:

in the calculation of a company's income before tax, the Cost of Goods Sold (COGS) is done using the basic formulae by Adding Opening year inventory with Purchases and subtracting Ending year Inventory. In the case where Ending year inventory has been overstated, the COGS that has been calculated is understated which implies that the Income before tax has been overstated.

In the vice versa scenario, where Ending year inventory has been understated, the COGS that has been calculated is overstated which implies that the Income before tax has been understated. The calculation of the same is done below:

Year 2015

Income Before Tax (Previous) - Ending year Inventory = Income before Tax (Corrected)

138,000 - 23,000 = $115,000

Year 2016

Income Before Tax (Previous) + Ending year Inventory = Income before Tax (Corrected)

254,000 + 61,000 = $315,000

Year 2017

Income Before Tax (Previous) + Ending year Inventory = Income before Tax (Corrected)

168,000 + 17,000 = $185,000