Staley Watch Company reported the following income statement data for a 2-year period.

Staley uses a periodic inventory system. The inventories at January 1, 2010, and December 31, 2011, are correct. However, the ending inventory at December 31, 2010, was overstated $5,000.

Instructions

(a) Prepare correct income statement data for the 2 years.

(b) What is the cumulative effect of the inventory error on total gross profit for the 2 years?

(c) Explain in a letter to the president of Staley Company what has happened—i.e., the nature of the error and its effect on the financial statements.

2010 2011 $210,000 $250,000 Sales Cost of goods sold Beginning inventory Cost of goods purchased Cost of goods available for sale Ending inventory 32,000 173,000 44,000 202,000 205,000 44,000 246,000 52,000 Cost of goods sold 161,000 194,000 $ 56,000 $ 49,000 Gross profit