Question

aughn Manufacturing reported these income statement data for a 2-year period. 2017 2016 Sales revenue $246,700 $190,450 Beginning inventory 43,240 35,100 Cost of goods purchased 211,980 173,640 Cost of goods available for sale 255,220 208,740 Less: Ending inventory 56,720 43,240 Cost of goods sold 198,500 165,500 Gross profit $48,200 $24,950 Vaughn Manufacturing uses a periodic inventory system. The inventories at January 1, 2016, and December 31, 2017, are correct. However, the ending inventory at December 31, 2016, is overstated by $7,770. Prepare correct income statement data for the 2 years. 2016 2017 Sales $ $ Cost of goods sold Beginning inventory Cost of goods purchased Cost of goods available for sale Less: Ending inventory Cost of goods sold Gross profit $ $ LINK TO TEXT What is the cumulative effect of the inventory error on total gross profit for the 2 years? The cumulative effect on total gross profit for the two years is $ . Click if you would like to Show Work for this question: Open Show Work LINK TO TEXT

Answer 1

• All working forms part of the answer
• We know that Cost of Goods Sold = Cost of goods available for sale – Ending inventory value.
• Calculation of CORRECT Cost of Goods Sold

	2017 ($)	2016 ($)
Opening Inventory	354702	35100
Add: Cost of Goods purchased	211980	173640
Cost of Goods available for sale	247450	208740
Less: Ending Inventory	56720	[43240-7770] 354701
Correct Cost of Goods Sold	$190730	$173270

1.Ending inventory is overstated by $7770, hence $7770 is reduced from $43240.
2.Correct ending inventory of 2016 will become the correct beginning inventory for 2017

• Effect on GP

When inventory was overstated, GP were

	2017	2016
Net Sales	246700	190450
Cost of Goods Sold	198500	165500
Gross Profit	$48200	$24950
GP %	20%	13%

When inventory was correctly recorded, GP are

	2017	2016
Net Sales	246700	190450
Cost of Goods Sold	190730	173270
Gross Profit	$55970	$17180
GP %	23%	9%

Cumulative effect will be that GP of 2016 will decrease, while GP of 2017 will increase. However, in totality, the GP amount of both years will be same, when inventory is overstated and when correctly recorded.