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PA7-5 (Algo) (Supplement 7B) Analyzing and Interpreting the Effects of Inventory Errors [LO 7-S2]

Partial income statements for Sherwood Company summarized for a four-year period show the following:

	2018	2019	2020	2021
Net Sales	$ 2,550,000	$ 2,950,000	$ 3,050,000	$ 3,550,000
Cost of Goods Sold	1,504,500	1,711,000	1,830,000	2,094,500
Gross Profit	$ 1,045,500	$ 1,239,000	$ 1,220,000	$ 1,455,500

An audit revealed that in determining these amounts, the ending inventory for 2019 was overstated by $22,200. The inventory balance on December 31, 2020, was accurately stated. The company uses a periodic inventory system. Required:

1. 1. Restate the partial income statements to reflect the correct amounts, after fixing the inventory error.
2. 2-a. Compute the gross profit percentage for each year (a) before the correction and (b) after the correction.
3. 2-b. Do the results lend confidence to your corrected amounts?