Grants Corporation prepared the following two income statements (simplified for illustrative purposes):

During the third quarter, it was discovered that the ending inventory for the first quarter should have been $4,400.
Required:
1. What effect did this error have on the combined pretax income of the two quarters? Explain.
2. Did this error affect the EPS amounts for each quarter? (See Chapter 5 for discussion of EPS.) Explain.
3. Prepare corrected income statements for each quarter.
4. Set up a schedule with the following headings to reflect the comparative effects of the correct and incorrect amounts on the income statement:

Transcribed Image Text:

First Quarter Second Quarter Sales revenue Cost of goods sold $11,000 $18,000 Beginning inventory Purchases Goods available for sale Ending inventory Cost of goods sold $4,000 3,000 7,000 3,800 $ 3,800 13,000 16,800 9,000 Gross profit Expenses Pretax income 3,200 7.800 5,000 2,800 7,800 10,200 6,000 S 4.200