Question

An audit revealed that in determining these amounts, the ending inventory for 2016 was overstated by $22,000. 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?

Partial income statements for Sherwood Company summarized for a four-year period show the following: Net Sales Cost of Goods Sold Gross Profit 2015 $2,286,200 1,196, 200 $ 704,200 1 2016 $2,686,200 ,742.299 $ 858,200 2013 $2,786,29 1.853.200 $ 827,200 2018 3,286,20a 2.176.200 $1,224,202 An audit revealed that in determining these amounts, the ending inventory for 2016 was overstated by $22,000. The inventory balance on December 31, 2017, was accurately stated. The company uses a periodic Inventory system. Required: 1. Restate the partial income statements to reflect the correct amounts, after fixing the inventory error 2-n. Compute the gross profit percentage for each year (a) before the correction and (b) after the correction 2-b. Does the pattern of gross profit percentages lend confidence to your corrected amounts? Complete this question by entering your answers in the tabs below. Red 1 Req ZA Req 2B Restate the partial income statements to reflect the correct amounts, after fixing the inventory error SHERWOOD COMPANY Income Statements (Corrected) 2015 2016 2017 2018 Net Sales Cost of Goods Sold Gross Profit Reg 1 Req 2A > Reqi Req ZA Rea 25 Compute the gross profil percentage for each year (a) before the correction and (b) alter the correction, (Round your answers to the nearest whole percent.) 2015 2016 2017 2018 Before Correction After Correction % % % < Reg1 Req 2B >

Answer 1

	SHERWOOD COMPANY
	Income Statements(Corrected)
		2015	2016	2017	2018
1	Net Sales	$22,00,000	$26,00,000	$27,00,000	$32,00,000
	Cost of goods sold(Opening inventory+Purchases-Closing inventory)	$14,96,000	$17,64,000	$18,41,000	$21,76,000
	Gross Profit	$7,04,000	$8,36,000	$8,59,000	$10,24,000
2.a	Before correction Gross margin	32%	33%	31%	32%
	After correction Gross margin	32%	32%	32%	32%
2.b	Yes
	Expanation:
	The oversatement of closing inventory will result into lower cost of goods sold.Hence to correct the error the overstatement amount is added back.
	Similarly the Opening inventory of 2017 is also overstated by $22,000 and to correct this error the same is decucted from cost of goods sold
	Gross Profit margin =Gross Profit / Net sales