Smart Watch Company reported the following income statement data for a 2-year period. 2019 2020
Sales revenue $220,000 $250,000
Cost of goods sold
Beginning inventory 32,000 44,000
Costs 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 at January 1, 2019, and December 31, 2020, are correct. However, the ending inventory at December 31, 2019, was overstated $6,000.

Required:
a. Prepare correct income statement data the 2 years.
b. What is the cumulative effect of the inventory error on total gross profit for the 2 years?

Answer and Explanation:

a. The preparation of the correct income statement is as follows:

Year                                   2019                      2020

Sales revenue                $220,000               $250,000

Cost of goods sold

Beginning inventory       $32,000                 $38,000

Add: Costs of goods

purchased                       $173,000               $202,000

Cost of goods available for sale $205,000     $240,000

Less: Ending inventory   -$38,000                    -$52,000

($44,000 - $6,000 )

Cost of goods sold           $167,000                  $188,000

Gross profit                       $53,000                   $62,000

b. The cumulative effect is

Incorrect gross profit = $59,000 + $56,000 = $115,000

Correct gross profit = $53,000 + $62,000 = $115,000

Net effect would be zero