The Following Inventory Valuation Errors Were Discovered by Knox Corporation's

question 38

Multiple Choice

The following inventory valuation errors were discovered by Knox Corporation's new controller just after the annual financial statements were published at the end of Year 3.
The year 3 ending inventory was understated by $17,000.
The year 2 ending inventory was understated by $61,000.
The year 1 ending inventory was overstated by $23,000.
The net income for Knox in each of these years was:
$\begin{array}{|l|rr|r|}\hline & \text { Year 3 } & \text { Year 2 } & \text { Year 1 } \\\hline \text { Net income } & \$ 168,000 & \$ 254,000 & \$ 138,000 \\\hline\end{array}$
Assuming there were no income taxes,what was the adjusted net income in each year?
$\begin{array}{|l|r|r|r|}\hline & \text { Year 3 } & \text { Year 2 } & \text { Year 1 } \\\hline \text { A) } & \$ 212,000 & \$ 170,000 & \$ 161,000 \\\hline \text { B) } & \$ 124,000 & \$ 338,000 & \$ 115,000 \\\hline \text { C) } & \$ 90,000 & \$ 338,000 & \$ 161,000 \\\hline \text { D) } & \$ 124,000 & \$ 170,000 & \$ 115,000 \\\hline\end{array}$

• A) Option A
• B) Option B
• C) Option C
• D) Option D

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Definitions:

GAAP

A standard collection of rules and standards for accounting that are widely used across the United States.

Asset Impairments

The reduction in the book value of an asset when its fair market value falls below its carrying amount on the balance sheet.

Depreciation Methods

Various approaches used to allocate the cost of a tangible asset over its useful life, such as straight-line, declining balance, or units of production methods.

Accounting Changes

Accounting changes refer to alterations in accounting policies, estimates, or the reporting entity that significantly impacts a company's financial statements.