Smart Watch Company reported the following income statement data for a two-year period.

Smart Watch uses a perpetual inventory system. The inventory amounts on January 1, 2023, and December 31, 2024, are correct. However, the ending inventory on December 31, 2023, was overstated by $6,000.

Instructions
a. Prepare correct income statements for 2023 and 2024.
b. What is the cumulative effect of the inventory error on total gross profit for the two years?
c. Explain in a letter to the president of Smart Watch Company what has happened; that is, explain the nature of the error and its effect on the financial statements.

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Sales Cost of goods sold Gross profit Operating expenses Profit for the year 2024 $250,000 194,000 56,000 22,000 $ 34,000 2023 $220,000 161,000 59,000 18,000 $ 41,000