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, 2020, that caused its ending 2020 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 6.12 (or Exhibit 6A.6) to show the effect of this error on the company?s cost of goods sold and gross profit in 2020, 2021, and 2022.

Exhibit 6.12

Transcribed Image Text:

For years ended December 31, 2020, 2021, 2022, Income statement information actually reported for years ended December 31, the Income statement Information should have 2020 2021 2022 been reported as: $30,000 18,000 $30,000 $30,000 $30,000 Sales. 20,000 20,000 22,000 $ 8,000 Cost of goods sold. $ 12,000 $ 10,000 $ 10,000 Gross profit from sales. 5,000 5,000 5,000 $ 3,000 5,000 $ 5,000 Operating expenses. $ 5,000- O-- 7,000 Profit. Merchandise Inventory Merchandise Inventory Merchandise Inventory Jan. 1/20 10,000 Jan. 1/21 12,000 Jan. 1/22 10,000 Purchases 20,000 18,000 COGSI Purchases 20,000 20,000 COGS Purchases 20,000 22,000 COGS Dec. 31/20 12,000- Dec. 31/21 10,000-- Dec. 31/22 10,000 2020 profit and gross profit are overstated (too high) and cost of goods sold is understated (too low) when ending inventory is overstated (too high). O Ending inventory for one period becomes the beginning inventory for the next period, carrying forward any errors that existed. 2021 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 2021, the second year. An inventory error in the year 2020 does not affect 2022.