Sprague Company reported these income statement data for a 2-year period.

Sprague Company reported these income statement data for a 2-year period.

2012

2011

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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.

 

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