Maurice Tutor
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Staley Watch Company reported the following income statement data for a 2-year period.
| Â |
2011 |
2012 |
|
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 |
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, 2011, and December 31, 2012, are correct. However, the ending inventory at December 31, 2011, 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.
| Â |
2010 |
2011 |
2012 |
|
Beginning inventory |
$ 100,000 |
$ 300,000 |
$ 400,000 |
|
Ending inventory |
300,000 |
400,000 |
480,000 |
|
Cost of goods sold |
900,000 |
1,120,000 |
1,300,000 |
|
Sales |
1,200,000 |
1,600,000 |
1,900,000 |
Instructions
Calculate inventory turnover, days in inventory, and gross profit rate (from Chapter 5) for Santo’s Photo Corporation for 2010, 2011, and 2012. Comment on any trends.