Question

PA7-5 (Supplement 7B) Analyzing and Interpreting the Effects of Inventory Errors [LO 7-S2]

Partial income statements for Sherwood Company summarized for a four-year period show the following:

	2015			2016			2017			2018
Net Sales	$	2,400,000		$	2,800,000		$	2,900,000		$	3,400,000
Cost of Goods Sold		1,584,000			1,820,000			1,943,000			2,244,000
Gross Profit	$	816,000		$	980,000		$	957,000		$	1,156,000

An audit revealed that in determining these amounts, the ending inventory for 2016 was overstated by $24,000. The inventory balance on December 31, 2017, was accurately stated. The company uses a periodic inventory system.

Required:

1. 1. Restate the partial income statements to reflect the correct amounts, after fixing the inventory error.
2. 2-a. Compute the gross profit percentage for each year (a) before the correction and (b) after the correction.
3. 2-b. Does the pattern of gross profit percentages lend confidence to your corrected amounts?

Answer 1

Part-1: Restated Parial Income Statement - Sherwood Company
Year	2015	2016	2017	2018
Net Sales	$2,400,000	$2,800,000	$2,900,000	$3,400,000
Less: Cost of Goods Sold	$1,584,000	$1,844,000	$1,919,000	$2,244,000
Gross Profit	$816,000	$956,000	$981,000	$1,156,000
Part-2(a) Computation of Gross Profit Percentage
	2015	2016	2017	2018
GP Percentage Before correction ( Gross Profit/ Netsales)	34%	35%	33%	34%
Gp percentage After correction ( Gross Profit/ Netsales)	34%	34%	34%	34%
2.b. The results lend confidence as the gross profit percentage is equal for all three quarters after corrections