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Exercise 5-12 Analysis of inventory errors LO A2 Vibrant Company had $1,030,000 of sales in each...

Exercise 5-12 Analysis of inventory errors LO A2

Vibrant Company had $1,030,000 of sales in each of Year 1, Year 2, and Year 3, and it purchased merchandise costing $565,000 in each of those years. It also maintained a $330,000 physical inventory from the beginning to the end of that three-year period. In accounting for inventory, it made an error at the end of Year 1 that caused its Year 1 ending inventory to appear on its statements as $310,000 rather than the correct $330,000.

Required:
1. Determine the correct amount of the company’s gross profit in each of Year 1, Year 2, and Year 3.
2. Prepare comparative income statements to show the effect of this error on the company's cost of goods sold and gross profit for each of Year 1, Year 2, and Year 3.
  

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Answer #1
1) Calculation of Gross profit
year 1 year 2 year 3 Total
sales 1030000 1030000 1030000 3090000
cost of goods sold
Beginning inventory 330000 330000 330000
cost of purchase 565000 565000 565000
Goods available for sale 895000 895000 895000
ending inventory 330000 330000 330000
cost of goods sold 565000 565000 565000 1695000
Gross profit 465000 465000 465000 1395000
year 1 year 2 year 3 Total
sales 1030000 1030000 1030000 3090000
cost of goods sold
Beginning inventory 330000 310000 330000
cost of purchase 565000 565000 565000
Goods available for sale 895000 875000 895000
ending inventory 310000 330000 330000
cost of goods sold 585000 545000 565000 1695000
Gross profit 445000 485000 465000 1395000

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