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Vibrant Company had $1,050,000 of sales in each of three consecutive years 2016–2018, and it purchased merchandise costing $575,000 in each of those years. It also maintained a $350,000 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 $330,000 rather than the correct $350,000.

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.
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Answer #1

1. Correct Amount of Gross Profit for year 2016, 2017 & 2018

Particular 2016 2017 2018
Total Sales $1050000 $1050000 $1050000
Less: Cost of Goods Sold
Opening Stock $350000 $350000 $350000
Add: Purchase $575000 $575000 $575000
Less: Closing Stock $350000 $350000 $350000
Cost of Goods Sold $575000 $575000 $575000
Gross Profit $475000 $475000 $475000

2. Comparative Statement: Year 2016, 2017 & 2018:

Particular 2016 2017 2018
Total Sales $1050000 $1050000 $1050000
Less: Cost of Goods Sold
Opening Stock $350000 $330000 $350000
Add; Purchase $575000 $575000 $575000
Less: Closing Stock $330000 $350000 $350000
Cost of Goods Sold $595000 $555000 $575000
Gross Profit $455000 $495000 $475000
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