(Supplement 7B) Analyzing and Interpreting the Effects of Inventory Errors Partial income statements… 1 answer below »

(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:

 

2007

2008

2009

2010

Net Sales

$2,000,000

$2,400,000

$2,500,000

$3,000,000

Cost of Goods Sold

1,400,000

1,660,000

1,770,000

2,100,000

Gross Profit

600,000

740,000

730,000

900,000

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.

Required:

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.

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