Cougar Corp utilizes a periodic inventory system. Below is the information that
ID: 2544146 • Letter: C
Question
Cougar Corp utilizes a periodic inventory system. Below is the information that was reported on Cougar Corp’s 2016 and 2017 Income Statements.
During January of 2018, you discover an error in Cougar Corp’s inventory records. Specifically, while an ending inventory count in 2016 revealed ending inventory of $50,000, Cougar Corp’s accountants mistakenly used $45,000 as their ending inventory in 2016 (beginning inventory in 2017). Assume this is the only mistake made.
2016
2017
Revenues
200,000
200,000
COGS
Beginning Inventory
40,000
45,000
Inventory Purchases
50,000
50,000
COGAS
90,000
95,000
Less: Ending Inventory
(45,000)
(40,000)
COGS
45,000
55,000
Gross Profit
155,000
145,000
Admin & Selling expenses
(40,000)
(35,000)
Net Income
115,000
110,000
You are tasked with making a retrospective adjustment to Cougar Corp’s financial statements. Therefore, you must determine what net income should have been in 2016 and 2017 if no mistake was made.
If no mistake was made, Cougar Corp’s net income for 2016 would have been ________________ and net income for 2017 would have been __________________.
Once Cougar Corp’s financial statements have been retrospectively adjusted to reflect the correct net income for 2016 and 2017, would Cougar Corp have to make an adjustment to the beginning balance of retained earnings for 2018?
Circle: Yes or No
Why or why not? Briefly explain.
2016
2017
Revenues
200,000
200,000
COGS
Beginning Inventory
40,000
45,000
Inventory Purchases
50,000
50,000
COGAS
90,000
95,000
Less: Ending Inventory
(45,000)
(40,000)
COGS
45,000
55,000
Gross Profit
155,000
145,000
Admin & Selling expenses
(40,000)
(35,000)
Net Income
115,000
110,000
Explanation / Answer
If no mistake has been made, the net income of 2016 would have been $ 120,000 adn net income of 2017 would have been $ 105,000.
Explanation: With the increase in ending inventory of 2016, the COGS will be reduced resulting in the increase in net income by $5,000.
However, with the change in beginning inventory of 2017, the COGS of the year will increase, resulting in net income would have been decreased by $5,000.
No adjustment is required in the Retained earnings.
This is becaue of the fact that the the net income is increased by $5000 andn net income of another year is decreased by $5000. Tthe effect has been nullified which is always been the case when any of the inventory has been recorded wrongly in the financial statement.