Matz Company had \(\$ 95,000\) of sales during each of three consecutive years, and it purchased merchandise costing \(\$ 70,000\) during each of the years. It also maintained a \(\$ 20,000\) inventory from the beginning to the end of the three-year period. However, in accounting under a periodic inventory system, it made an error at the end of year 1 that caused its ending year 1 inventory to appear on its statements at \(\$ 25,000\), rather than the correct \(\$ 20,000\).

\section*{Required}

1. State the actual amount of the company's gross profit in each of the years.

2. Prepare a comparative income statement like the one illustrated in this chapter to show the effect of this error on the shop's cost of goods sold and gross profit in year 1 , year 2 , and year 3 .

\section*{Exercise 8-6}

Perpetual inventory system-FIFO cost flow (L.O. 4)