Smart Watch Company reported the following income statement data for a 2-year period. 2016 2017 Sales revenue $220,000 $250,000 Cost of goods sold Beginning inventory 32,000 44,000 Cost of goods...

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

	2016	2017
Sales revenue	$220,000	$250,000
Cost of goods sold
Beginning inventory	32,000	44,000
Cost of goods purchased	173,000	202,000
Cost of goods available for sale	205,000	246,000
Ending inventory	44,000	52,000
Cost of goods sold	161,000	194,000
Gross profit	$ 59,000	$ 56,000

Smart uses a periodic inventory system. The inventories on January 1, 2016, and December 31, 2017, are correct. However, the ending inventory on December 31, 2016, was overstated $6,000.

Instructions

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, i.e., the nature of the error and its effect on the financial statements.

Jun 08, 2022

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Smart Watch Company reported the following income statement data for a 2-year period. 2016 2017 Sales revenue $220,000 $250,000 Cost of goods sold Beginning inventory 32,000 44,000 Cost of goods...

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