The owners of City Software are offering the business for sale. The income statements of the business for the three years of its existence are summarized below.

In negotiations with prospective buyers of the business, the owners are calling attention to the rising trends of the gross profit and the gross profit percentage as very favorable elements. Assume that you are retained by a prospective purchaser of the business to make an investigation of the fairness and reliability of the enterprise’s accounting records and financial statements. You find everything in order except for the following: (1) An arithmetic error in the computation of inventory at the end of 2013 caused a $20,000 understatement in that inventory, and (2) an error in the computation of inventory at the end of 2015 caused an overstatement of $80,000 in that inventory. The company uses the periodic inventory system, and these errors have not been brought to light prior to your investigation.

Instructions

a. Prepare a revised three-year abbreviated income statement summary.

b. Comment on the trends of gross profit and gross profit percentage before and after the revision.

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2015 2014 2013 Net sales .... Cost of goods sold Gross profit on sales Gross profit percentage . $840,000 546,000 $1,000,000 600,000 $920,000 570,400 $ 400,000 40% $349,600 $294,000 35% 38%