Memo
Memo
To: Ms. Ramos
From: DOraimi
Subject: 2012 Income Correction
Date: 01/20/2014
You believe that the $1 million overstatement of the 2011 ending inventory has no impact on 2012’s reported income, because 2012 ending inventory is correct. In this memo, I will explain how the overstatement in 2011 ending inventory affects 2012’s reported income.
Based on the formula “Cost of good sold= Beginning inventory + Inventory purchased – Ending inventory”, the cost of good sold during 2012 is equal to 2012 beginning inventory, which should equal the 2011 ending inventory plus inventory purchased over 2012 minus 2012 ending inventory. Therefore, a $1 million overstatement on the 2011 ending inventory causes a $1 million overstatement on the cost of good sold over 2012. Because 2012’s reported income is equal to the amount after cost of good sold has been subtracted from sales, a $1 million overstatement on the cost of good sold results in a $ 1 million understatement on 2012’s reported income.
In conclusion, the error found on the 2011 ending inventory caused $1 million understatement on 2012’s reported income and is an error that needs to be corrected. If you have any further questions, feel free to contact me.
Acknowledgments
This handbook reflects the work, ideas, and generosity of many individuals and organizations at the SEC and in the private sector.
At the SEC, staff in the Divisions of Corporation Finance and Investment Management, the Offices of Public Affairs and General Counsel, and the Chairman’s Office provided insightful comments. In particular, Commissioner Isaac C. Hunt Jr., Nick Balamaci, Barry Barbash, Gregg Corso, Brian Lane, Diane Sanger, Jennifer Scardino, Michael Schlein, Heidi Stam, and Tony Vertuno offered invaluable advice and guidance.
Corporate officials and lawyers enthusiastically helped us to breathe life into our plain English initiatives and this handbook. The Society of Corporate Secretaries, the American Bar
To: Ms. Ramos
From: DOraimi
Subject: 2012 Income Correction
Date: 01/20/2014
You believe that the $1 million overstatement of the 2011 ending inventory has no impact on 2012’s reported income, because 2012 ending inventory is correct. In this memo, I will explain how the overstatement in 2011 ending inventory affects 2012’s reported income.
Based on the formula “Cost of good sold= Beginning inventory + Inventory purchased – Ending inventory”, the cost of good sold during 2012 is equal to 2012 beginning inventory, which should equal the 2011 ending inventory plus inventory purchased over 2012 minus 2012 ending inventory. Therefore, a $1 million overstatement on the 2011 ending inventory causes a $1 million overstatement on the cost of good sold over 2012. Because 2012’s reported income is equal to the amount after cost of good sold has been subtracted from sales, a $1 million overstatement on the cost of good sold results in a $ 1 million understatement on 2012’s reported income.
In conclusion, the error found on the 2011 ending inventory caused $1 million understatement on 2012’s reported income and is an error that needs to be corrected. If you have any further questions, feel free to contact me.
Acknowledgments
This handbook reflects the work, ideas, and generosity of many individuals and organizations at the SEC and in the private sector.
At the SEC, staff in the Divisions of Corporation Finance and Investment Management, the Offices of Public Affairs and General Counsel, and the Chairman’s Office provided insightful comments. In particular, Commissioner Isaac C. Hunt Jr., Nick Balamaci, Barry Barbash, Gregg Corso, Brian Lane, Diane Sanger, Jennifer Scardino, Michael Schlein, Heidi Stam, and Tony Vertuno offered invaluable advice and guidance.
Corporate officials and lawyers enthusiastically helped us to breathe life into our plain English initiatives and this handbook. The Society of Corporate Secretaries, the American Bar