(Supplement 7B) Analyzing and Interpreting the Effects of Inventory Errors
Partial income statements for Sherwood Company summarized for a four-year period show the following:
Cost of Goods Sold
An audit revealed that in determining these amounts, the ending inventory for 2008 was overstated by $20,000. The inventory balance on December 31, 2009, was accurately stated. The company uses a periodic inventory system.
1. Restate the partial income statements to reflect the correct amounts, after fixing the inventory error.
2. Compute the gross profit percentage for each year ( a ) before the correction and ( b ) after the correction, rounding to the nearest percentage. Do the results lend confidence to your corrected amounts? Explain.