A company's financial statements indicate that the company has $10 million in inventory. However, during an inventory
Question:
A company's financial statements indicate that the company has $10 million in inventory. However, during an inventory count, it is discovered that only $8 million worth of inventory is actually present. It is suspected that the company's inventory was overstated to hide theft or other fraudulent activity.
Assuming that the company's inventory was intentionally overstated, answer the following questions:
a) What is the percentage overstatement of inventory?
b) If the company's cost of goods sold is 60% of its sales, what is the impact of the inventory overstatement on the company's reported gross profit?
c) If the company's net income before taxes is reported to be $5 million based on the overstated inventory, what would the actual net income before taxes be if the inventory were correctly stated?
Foundations of Financial Management
ISBN: 978-1259024979
10th Canadian edition
Authors: Stanley Block, Geoffrey Hirt, Bartley Danielsen, Doug Short, Michael Perretta