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

2012 2011 Sales revenue $250,000 $210,000 Beginning inventory 40,000 32,000 Cost of goods purchased 202,000 173,000 Cost of goods available for sale 242,000 205,000 Less: Ending inventory 55,000 40,000 Cost of goods sold 187,000 165,000 Gross profit $ 63,000 $ 45,000 Sprague Company uses a periodic inventory system. The inventories at January 1, 2011, and December 31, 2012, are correct. However, the ending inventory at December 31, 2011, is overstated by $8,000.

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 Sprague Company what has happened—that is, the nature of the error and its effect on the financial statements.