A company had $10,000 of sales, and it purchased merchandise costing $7,000 in each of Year 1, Year 2, and Year 3. It also maintained a $2,000 physical inventory from the beginning to the end of that three-year period. In accounting for inventory, it made an error at the end of Year 1 that caused its Year 1 ending inventory to appear on its statements as $1,600 rather than the correct $2,000.

(a) Determine the correct amount of the company’s gross profit in each of Year 1, Year 2, and Year 3.

(b) Prepare comparative income statements as in Exhibit 5.11 to show the effect of this error on the company’s cost of goods sold and gross profit for each of Year 1, Year 2, and Year 3.

Data from Exhibit 5.11

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Income Statements Sales ...... Cost of goods sold Beginning inventory....... Cost of goods purchased... Goods available for sale... Ending inventory ...... Cost of goods sold.. Gross profit... Expenses... Net income *Correct amount is $20,000. Year 1 $20,000 60,000 80,000 16,000* $100,000 64,000* 36,000 10,000 $ 26,000 *Correct amount is $60,000. Year 2 $16,000* 60,000 76,000 20,000 $100,000 56,000* 44,000 10,000 $ 34,000 Year 3 $20,000 60,000 80,000 20,000 $100,000 60,000 40,000 10,000 $ 30,000 Correct Income is $30,000 for each year.