Question

reported pretax income of $25,000 during 2018 and $30,000 during 2019. Later it was discovered that the ending inventory for 2018 was understated by $2,000 (and not corrected in 2018). What is the correct pretax income for 20

Answer 1

The correct pretax income in 2018 is $27000.

The correct pretax income in 2019 is $28000.

Step-by-step explanation:

In 2018, the reported pretax income was $25000, however, ending inventory was understated by $2000.

The Cost of goods sold was overstated making net income understated.

∴ The correct pretax income for 2018 should be =
`\$ 25000+\$ 2000= \$ 27000`.

In 2019, the reported pretax income was $30000, which means it is overstated by $2,000.

∴ The correct pretax income for 2019 should be =
`\$ 30000-\$ 2000= \$ 28000`

∵ The understated ending inventory would become beginning inventory which would cause the cost of goods sold to be understated and net income was overstated.