Staley Watch Company reported the following income statement data for a 2 year period.
|
2010 |
2011 |
|
|
Sales |
$210,000 |
$250,000 |
|
Cost of goods sold |
||
|
Beginning inventory |
32,000 |
44,000 |
|
Cost of goods purchased |
173,000 |
202,000 |
|
Cost of goods available for sale |
205,000 |
246,000 |
|
Ending inventory |
44,000 |
52,000 |
|
Cost of goods sold |
161,000 |
194,000 |
|
Gross profit |
$ 49,000 |
$ 56,000 |
Staley uses a periodic inventory system. The inventories at January 1, 2010, and December 31, 2011, are correct. However, the ending inventory at December 31, 2010, was overstated $5,000.
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 Staley Company what has happened—i.e., the nature of the error and its effect on the financial statements.