Question

Wellington Company reported net income of $60,000 in 2017 and $80,000 in 2018. However, ending inventory was overstated by $7,000 in 2017.Compute the correct net income for Wellington Company for 2017 and 2018.

Answer 1

Answer:

2017 Net Income = $53000

2018 Net Income = $87000

Explanation:

The overstatement of ending/closing inventory causes the Cost of Goods Sold (COGS) to be understated and the Gross and Net profit to be overstated by the same amount.

If the 2017 ending inventory was iverstated by $7000, the correct profit figure for 2017 will be $7000 less than is reported.

2017 correct Net Income = 60000 - 7000 = $53000

An overstatment of ending inventory in one year also means and overstatement of opening inventory of the next year. Thus, the 2018 opening inventory is overstated by $8000 and an overstatement of opening inventory means an overstatement of COGS and an understatement of Gross and Net Income by the same amount.

Thus, the correct Net Income for 2018 = 80000 + 7000 = $87000