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

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

	First Quarter						Second Quarter
Sales revenue			$	11,700							$	20,000
Cost of goods sold
Beginning inventory	$ 3,800						$	3,700
Purchases	3,400							12,600
Goods available for sale	7,200							16,300
Ending inventory	3,700							9,800
Cost of goods sold				3,500								6,500
Gross profit				8,200								13,500
Expenses				4,100								5,300
Pretax income			$	4,100							$	8,200

During the third quarter, it was discovered that the ending inventory for the first quarter should have been $4,260.

Required:

1. What effect did this error have on the combined pretax income of the two quarters?

No effect 

2. Which quarter's (if any) EPS amount were affected by this error?

Both quarters 

3. Prepare corrected income statements for each quarter.

Explanation:

1.

The $560 understatement of ending inventory produced pretax income amounts that were incorrect by the amount of $560 for each quarter. However, the effect on pretax income for each quarter was opposite (i.e., the first quarter pretax income was understated by $560, and in the second quarter it was overstated by $560). This self-correcting produces a correct combined income for the two quarters.

2.

The error caused the pretax income for each quarter to be incorrect [see (1) above]; therefore, it produced incorrect EPS amounts for each quarter.

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