The income statements for four consecutive years for Clement Company reflected the following summarized amounts:

Subsequent to development of these amounts, it has been determined that the physical inventory taken on December 31, 2004, was understated by $3,000.
Required: 1. Recast the income statements to reflect the correct amounts, taking into consideration the inventory error. 2. Compute the gross profit percentage for each year

(a) before the correction and

(b) after the correction.

Do the results lend confidence to your corrected amounts? Explain. 3. What effect would the error have had on the income tax expense assuming a 30 percent average rate?

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2003 2004 2005 2006 Sales revenue $50,000 $51.000 $62.000 $58,000 Cost of goods sold 32,500 35,000 43,000 37.000 Gross profit 17,500 16,000 19.000 21.000 Expenses 10,000 12,000 14,000 12,000 Pretax income $ 7,500 $ 4,000 $ 5,000 $ 9,000