Horner Watch Company reported the following income statement data for a 2-year period.

2013 Sales revenue $210,000 Cost of goods sold Beginning inventory 32,000 Cost of goods purchased 173,000 Cost of goods available for sale 205,000 Ending inventory 44,000 Cost of goods sold 161,000 Gross profit $ 49,000 2014

$250,000 44,000 202,000 246,000 52,000 194,000

$ 56,000 Horner uses a periodic inventory system. The inventories at January 1, 2013, and December 31, 2014, are correct. However, the ending inventory at December 31, 2013, was understated $6,000.

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 Horner Watch Company what has happened, i.e., the nature of the error and its effect on the financial statements.