# Shetland Company reported net income on the year-end financial statements of \$125,000. However, errors in inventory were discovered after the reports were issued. If inventory was understated by \$15,000, how much net income did the company actually earn?

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### Principles of Accounting Volume 1

19th Edition
OpenStax
Publisher: OpenStax College
ISBN: 9781947172685

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FindFindarrow_forward

### Principles of Accounting Volume 1

19th Edition
OpenStax
Publisher: OpenStax College
ISBN: 9781947172685
Chapter 10, Problem 15EA
Textbook Problem
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## Shetland Company reported net income on the year-end financial statements of \$125,000. However, errors in inventory were discovered after the reports were issued. If inventory was understated by \$15,000, how much net income did the company actually earn?

To determine

Concept introduction:

Inventory errors are error is inventory counting or valuation. Counting errors are made at the time of yearend while inventory counting is done and the valuation errors are made at the time of preparing the financial statement.

Cost of Goods sold is calculated with the help of following formulas:

Cost of goods sold = Beginning Inventory + Purchases − Ending Inventory

Or

Cost of goods sold = Goods Available for sale − Ending Inventory

Net Income = Sales Revenue − Cost of Goods sold and other expenses

To calculate:

The actual net income.

### Explanation of Solution

The actual net income is calculated as follows:

Incorrect net income \$125000

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