Question

Exercise 5-12 Analysis of inventory errors LO A2

Vibrant Company had $990,000 of sales in each of three consecutive years 2016–2018, and it purchased merchandise costing $545,000 in each of those years. It also maintained a $290,000 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 2016 that caused its year-end 2016 inventory to appear on its statements as $270,000 rather than the correct $290,000.

Required:
1. Determine the correct amount of the company’s gross profit in each of the years 2016–2018.
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 the years 2016−2018.
  

Answer 1

Answer 1.

Determination of correct amount of the company’s gross profit.

	2016		2017		2018		Total
Sales		$990,000		$990,000		$990,000	$2,970,000
Cost of goods sold
Beginning inventory	$290,000		$290,000		$290,000
Cost of purchases	545,000		545,000		545,000
Goods available for sale	835,000		835,000		835,000
Ending inventory	290,000		290,000		290,000
Cost of goods sold		545,000		545,000		545,000	1,635,000
Gross profit		$445,000		$445,000		$445,000	$1,335,000

Answer 2.

Vibrant Company

Comparative Income Statements

	2016		2017		2018		Total
Sales		$990,000		$990,000		$990,000	$2,970,000
Cost of goods sold
Beginning inventory	$290,000		$270,000		$290,000
Cost of purchases	545,000		545,000		545,000
Goods available for sale	835,000		815,000		835,000
Ending inventory	270,000		290,000		290,000
Cost of goods sold		565,000		525,000		545,000	1,635,000
Gross profit		$425,000		$465,000		$445,000	$1,335,000