Question

In 1981, Wayne Enterprises discovered the following errors related to their 1980 financial statement, which stated a net income of $185,000.

Here is what happened:

1. Wayne Enterprises had shipped goods F.O.B shipping point to a distant customer on December 29, 1980. The goods had a selling price of $70,670. The revenue (and accounts receivable) were recorded by Wayne Enterprises on January 3, 1980.

2. Wayne Enterprises had made a calculation error in the worksheets used for the year-end 1980 physical inventory. Inventory was understated by $18,870.

3. Inventory of $9,250 was received on December 30, 1980 (and included in the December 31, 1980 physical inventory count) had not been recorded as an Accounts Payable until half way through the month of January 1981.

Note: Wayne Enterprises uses the perpetual inventory method.

Instructions:

Calculate to find Wayne Enterprises' restated net income. (Disregard income taxes on adjustments to net income.)

Answer 1

Solution

Wayne Enterprises

Restated Income Statement

Wayne Enterprises
Restated Income Statement
For the Year Ended 1980
net income	$185,000
Add: goods shipped on Dec 29	$70,670
Add: ending inventory understated	$18,870
restated income	$274,540

Notes –

1. Inventory shipped on December 29 is not recorded as on December 31. Hence, the revenue is understated which makes net income understated by $70,670. Hence, the same is added back.

2. Ending inventory understated in 1980, indicates that cost of goods sold is overstated. When cost of goods sold is overstated, the net income is understated. Hence, $18,870 is added back to net income.

3. No correction is needed, since the inventory received is recorded as on December 31.