PA7-5 (Supplement 7B) Analyzing and Interpreting the Effects of Inventory Errors [LO 7-S2]

Partial income statements for Sherwood Company summarized for a four-year period show the following:

	2015			2016			2017			2018
Net Sales	$	3,000,000		$	3,400,000		$	3,500,000		$	4,000,000
Cost of Goods Sold		1,800,000			2,006,000			2,135,000			2,400,000
Gross Profit	$	1,200,000		$	1,394,000		$	1,365,000		$	1,600,000

An audit revealed that in determining these amounts, the ending inventory for 2016 was overstated by $30,000. The inventory balance on December 31, 2017, was accurately stated. The company uses a periodic inventory system. Required:

1. 1. Restate the partial income statements to reflect the correct amounts, after fixing the inventory error.
2. 2-a. Compute the gross profit percentage for each year (a) before the correction and (b) after the correction.
3. 2-b. Does the pattern of gross profit percentages lend confidence to your corrected amounts?