Smart Watch Company reported the following income statement data for a 2-year period.Smart uses a periodic inventory system. The inventories at January 1, 2021, and December 31, 2022, are correct. However, the ending inventory at December 31, 2021, was overstated $6,000.

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 Smart Watch Company what has happened, that is, the nature of the error and its effect on the financial statements.

Transcribed Image Text:

Sales revenue Cost of goods sold Beginning inventory Cost of goods purchased Cost of goods available for sale Ending inventory Cost of goods sold Gross profit 2022 $250,000 44,000 202,000 246,000 52,000 194,000 $ 56,000 2021 $220,000 32,000 173,000 205,000 44,000 161,000 $ 59,000