Question:
Assume that Volleyball Pro Equipment had $900,000 of sales during each of three consecutive years, and it purchased merchandise costing $500,000 during each of the years. It also maintained a $200,000 inventory from the beginning to the end of the three-year period. However, it made an error at the end of the first year, 2023, that caused its ending 2023 inventory to appear on its statements at $180,000 rather than the correct $200,000.
Required
1. Calculate the actual amount of the company’s gross profit in each of the years.
2. Prepare a comparative income statement like Exhibit 6.13 (or Exhibit 6A.6) to show the effect of this error on the company’s cost of goods sold and gross profit in 2023, 2024, and 2025.
Transcribed Image Text:
Sales............
Cost of goods sold......
Gross profit from sales.....
Operating expenses.........
Profit................
For years ended December 31,
2023, 2024, 2025,
the income statement
information should have been
reported as:
$30,000
20,000
$ 10,000
5,000
$5,000-
2023
Merchandise Inventory
Jan, 1/23 10,000
Purchases 20,000 18,000 COGS
Dec. 31/23 12,000----2
Income statement information
actually reported for
years ended December 31,
2024
$30,000
18,000
$ 12,000
5,000
$7,000
3
$30,000
22,000
$ 8,000
5,000
$3,000
Merchandise Inventory
Jan. 1/24 12,000
Purchases 20,000 22,000 COGS
Dec. 31/24 10,000---2--
2025
$30,000
20,000
$10,000
5,000
$ 5,000
Merchandise Inventory
Jan. 1/25 10,000
Purchases 20,000 20,000 COGS
Dec. 31/25 10,000
2023 profit and gross profit are overstated (too high) and cost of goods sold is understated (too low) when ending inventory is
overstated (too high).
2 Ending inventory for one period becomes the beginning inventory for the next period, carrying forward any errors that existed.
© 2024 profit and gross profit are understated (too low) and cost of goods sold is overstated (too high) when beginning inventory
is overstated (too high). Notice that the error has reversed itself in 2024, the second year.
4 An inventory error in the year 2023 does not affect 2025.
Page 451