Sprague Company reported these income statement data for a 2-year period.
|
2012 |
2011 |
|
|
Sales revenue |
$250,000 |
$210,000 |
|
Beginning inventory |
40,000 |
32,000 |
|
Cost of goods purchased |
202,000 |
173,000 |
|
Cost of goods available for sale |
242,000 |
205,000 |
|
Less: Ending inventory |
55,000 |
40,000 |
|
Cost of goods sold |
187,000 |
165,000 |
|
Gross profit |
$63,000 |
$45,000 |
Sprague Company uses a periodic inventory system. The inventories at January 1, 2011, and December 31, 2012, are correct. However, the ending inventory at December 31, 2011, is overstated by $8,000.
Instructions
(a) Prepare correct income statement data for the 2 years.
(b) What is the cumulative effect of the inventory error on total gross profit for the 2 years?
(c) Explain in a letter to the president of Sprague Company what has happened—that is, the nature of the error and its effect on the financial statements.