Miller Company reported these income statement data for a 2-year period.

Statements.

(SO 8) 2008 2007 Sales $250,000 $210,000 Beginning inventory 40,000 34,000 Cost of goods purchased 202,000 173,000 Cost of goods available for sale 242,000 207,000 Ending inventory 55,000 40,000 Cost of goods sold 187,000 167,000 Gross profit $ 63,000 $ 43,000 Miller Company uses a periodic inventory system. The inventories at January 1, 2007, and December 31, 2008, are correct. However, the ending inventory at December 31, 2007, is overstated by $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 Miller Company what has happened—that is, the nature of the error and its effect on the financial statements.