CPA Study Group
If you plug in some numbers for the calculations. Let's say Beginning Inventory was initially $200,000 and they purchased $80,000 and had Ending Inventory of $20,000. That would make the year 2 Ending be the $260,000 in the problem. If $18,000 was missed in the count for year one that would change the $200,000 to $218,000 and if $7,000 was counted twice, it would make the corrected ending inventory $13,000. With the new numbers, $218,000 + $80,000 - $13,000 = $285,000. But the listed answer is $235,000. Is this question wrong or am I missing something.
What I found interesting is I keep coming to the same answer C.
If 18,00 inventory was omitted from Year 1 meaning Inventory is understated and CGS is "overstated". But, in the answer is says that CGS is too low. That does not make any sense. I would love to hear some can explain this to me I love to hear the reasoning.
I think the answer is correct. $200,000 and $260,000 are profits for year one and two but not inventory. The problem states that the merchandise (ending inventory) of year one was omitted by $18,000. This information is used for second year as the beginning inventory underestimated (too low) by $18,000. Another piece of information is that the ending inventory of year two was accidentally counted twice which is overestimated (too high) by $7,000. It doesn’t seem right that the EXPLANATION provided the $25,000 when one is too low but another is too high. Too calculate profit however we need to use:
profit = revenue - cost of goods sold
= revenue - (beginning inventory + net purchase - ending inventory)
original profit = revenue - (beginning inventory + net purchase - ending inventory)=260,000
revised profit = revenue - ((beginning inventory+18,000) + net purchase - (ending inventory -7,000))
= revenue - (beginning inventory + net purchase - ending inventory + 25,000)
= revenue - (beginning inventory + net purchase - ending inventory) -25,000
= 260,000 -25,000