Question

Rulix Watch Company reported the following income statement data for a 2-year period. 2018 2019 Sales revenue $220,000 $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 $59,000 $56,000 Rulix Watch Company uses a periodic inventory system. The inventories at January 1, 2018, and December 31, 2019, are correct. However, the ending inventory at December 31, 2018, was overstated $6,000.

(a) Prepare correct income statement data for the 2 years. 2018 2019 Sales $ $ Cost of goods sold    Beginning inventory    Cost of goods purchased    Cost of goods available for sale    Ending inventory    Cost of goods sold Gross profit $ $

Answer 1

Ending inventory at December 31, 2018 is overstated by $6000.It should have been $38000 (instead of given amount of $44000). When we correct this error, it will result in reduction of gross profit by $6000. New gross profit in 2018 will be $53000.

When the Ending inventory at December 31, 2018 is overstated by $6000, it will mean that the beginning inventory at December 31, 2019 will also be overstated by $6000, because ending inventory in December 2018 is the beginning inventory for 2019. So, beginning inventory for 2019 will also be $38000. When we correct this error, it will result in increasing the amount of cost of goods available for sale in 2019 to $240000. This will also lead to reduction of cost of goods sold in 2019. When the cost of goods sold is reduced, it will increase the gross profit in 2019 to $62000. Required income statement is given below:

Income statement:

	2018	2019
Sales	$220000	$250000
Cost of goods sold
Beginning inventory	32000	38000
Cost of goods purchased	173000	202000
Cost of goods available for sale	205000	240000
Ending inventory	38000	52000
Cost of goods sold	167000	188000
Gross Profit	$53000	$62000