Staley Watch Company reported the following income statement data for a 2-year period.

Staley uses a periodic inventory system. The inventories at January 1, 2008, and December 31, 2009, are correct. However, the ending inventory at December 31, 2008, was overstated \($5,000. \)

Instructions

(a) Prepare correct income statement data for the 2 years.

(b) What is the cumulative effect of the inventory error on total gross profit for the 2 years?

(c) Explain in a letter to the president of Staley Company what has happened i.e., the nature of the error and its effect on the financial statements.

Transcribed Image Text:

2008 2009 Sales Cost of goods sold Beginning inventory $210,000 $250,000 32,000 44,000 Cost of goods purchased 173,000 202,000 Cost of goods available for sale 205,000 246,000 Ending inventory 44,000 52,000 Cost of goods sold 161,000 Gross profit $ 49,000 194,000 $ 56,000