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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

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 $ 2,400,000 $ 2,800,000 $ 2,900,000 $ 3,400,000
Cost of Goods Sold 1,584,000 1,820,000 1,943,000 2,244,000
Gross Profit $ 816,000 $ 980,000 $ 957,000 $ 1,156,000

An audit revealed that in determining these amounts, the ending inventory for 2016 was overstated by $24,000. 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?

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