Question

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

	2015			2016			2017			2018
Net Sales	$	2,500,000		$	2,900,000		$	3,000,000		$	3,500,000
Cost of Goods Sold		1,625,000			1,856,000			1,980,000			2,275,000
Gross Profit	$	875,000		$	1,044,000		$	1,020,000		$	1,225,000

An audit revealed that in determining these amounts, the ending inventory for 2016 was overstated by $25,000. 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

		BEFORE CORRECTION
		2015	2016	2017	2018
	Net Sales	$2,500,000	$2,900,000	$3,000,000	$3,500,000
	Cost of Goods Sold	$1,625,000	$1,856,000	$1,980,000	$2,275,000
	Gross Profit	$875,000	$1,044,000	$1,020,000	$1,225,000
2	Gross Profit Percentage	35%	36%	34%	35%
	Corrected Cost of Goods Sold in2016	$1,881,000	(1856000+25000)
		AFTER CORRECTION
		2015	2016	2017	2018
	Net Sales	$2,500,000	$2,900,000	$3,000,000	$3,500,000
	Cost of Goods Sold	$1,625,000	$1,881,000	$1,980,000	$2,275,000
	Gross Profit	$875,000	$1,019,000	$1,020,000	$1,225,000
2	Gross Profit Percentage	35%	35%	34%	35%
	The pattern of corrected gross profit percentage , shows that the percentage was same in Year 2015 and 2016
	This lends confidence to corrected amount