Vibrant Company had $970,000 of sales in each of three consecutive years 2016-2018, and it purchased merchandise costing $535,000 in each of those years. It also maintained a $270,000 physical inventory from the beginning to the end of that three-year period. In accounting for inventory, it made an error at the end of year 2016 that caused its year-end 2016 inventory to appear on its statements as $250,000 rather than the correct $270,000.
1. Determine the correct amount of the company's gross profit in each of the years 2016-2018.
2. Prepare comparative income statements to show the effect of this error on the company's cost of goods sold and gross profit for each of the years 2016-2018.
The Effects of Inventory Errors:
When inventory is overstated or understated in any given financial year, the error would affect the net income of that year and of the following year, because ending inventory is rolled forward as beginning inventory.
Answer and Explanation: 1
1. The correct amount of the company's gross profit in each year is:
|Cost of goods sold|
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fromChapter 6 / Lesson 13
For companies, a miscount of inventory can be a serious issue. In this lesson we'll look at the effects of inventory errors on companies, both with respect to profits and how the error should be recorded.