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A company had $10,000 of sales, and purchased merchandise costing $7,000 in each of Year 1, Year 2, and Year 3. It also maintained a
A company had $10,000 of sales, and 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 6.11 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. Inventory Error Example Income Statements 2016 2017 2018 $100,000 $100,000 $100,000 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..................... $20,000 60,000 80,000 16,000 $16,000* 60,000 76,000 20,000 $20,000 60,000 80,000 20,000 * 64,000 36,000 10,000 $ 26,000 56,000 44,000 10,000 $ 34,000 60,000 40,000 10,000 $ 30,000 Expenses. Correct Income is $30,000 for each year. * Correct amount is $20,000. Correct amount is $60,000 Company has steady $20,000 inventory level Company makes $60,000 in purchases each year (COGS) Company has a gross profit of $40,000
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