Staley Watch Company reported the following income statement data for a 2-year period.
2008 2009
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, 2008, and December 31,
2009, are correct. However, the ending inventory at December 31, 2008, 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?
To prepare the correct income statement data for the two years, we need to adjust the numbers for the inventory error in 2008.
(a) Here's how to calculate the correct income statement data:
1. Calculate the correct cost of goods sold (COGS) for 2008:
Beginning inventory: $32,000
Cost of goods purchased: $173,000
Cost of goods available for sale: $205,000
Ending inventory (overstated): $44,000 - $5,000 = $39,000
Correct COGS for 2008: $205,000 - $39,000 = $166,000
2. Calculate the correct gross profit for 2008:
Gross profit = Sales - COGS
Correct gross profit for 2008: $210,000 - $166,000 = $44,000
3. Calculate the correct gross profit for 2009:
Gross profit for 2009 is already given as $56,000.
Now we have the correct gross profit figures for both years:
2008 sales: $210,000
2008 COGS: $166,000
2008 gross profit: $44,000
2009 sales: $250,000
2009 COGS: $194,000
2009 gross profit: $56,000
(b) To calculate the cumulative effect of the inventory error on total gross profit for the two years, we need to compare the correct gross profit figures with the reported gross profit figures.
Cumulative effect = Reported gross profit - Correct gross profit
Cumulative effect = ($49,000 - $44,000) + ($56,000 - $56,000) = $5,000
Therefore, the cumulative effect of the inventory error on total gross profit for the two years is $5,000.