E7-4

(The financial statement effects ofinventory errors)

# Pacers Corporation reported the following items in its 1997 financial report.

1997 1996

$19^,000 240,000 Sales Cost of goods sold:

Beginning inventory Purchases Goods available for sale- ~$430,000 Less: Ending inventory 2^000 Cost of goods sold Gross profit

$400,000 $250,000

/

$175,000 125,000

$300,000 190,000 195,000 ^ 110,000

$205,000 $140,000 ADDITIONAL INFORMATION:

The ending inventory amount was obtained by a physical count of the inventory on hand at the end of the year. Counting errors caused the ending inventory in 1996 to be understated by

$9,000 and the ending inventory in 1997 to be overstated by $9,000.

REQUIRED:

a. Compute the impact of these errors on Cost of Goods Sold for the year ended December 31, 1996, and on the inventory balance as of December 31, 1996.

b. Compute the impact of these errors on Cost of Goods Sold for the year ended December 31, 1997, and on the inventory balance as of December 31, 1997.

c. What is the impact of these errors on Cost of Goods Sold over the two-year period ended December 31, 1997?