Vibrant Company had $980,000 of sales in each of three consecutive years 2016-2018, and it purchased merchandise costing $540,000 in each of those years. It also maintained a $280,000 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 $260,000 rather than the correct $280,000.

Required:

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.

(1) $440,000 (2) due to this error in inventory it had an effect on both years 2016 and 2017 because closing inventory of previous year will be opening inventory of the subsequent year.

Explanation:

Solution

Given that:

(1) The correct amount of gross profit in each of the years 2016-18 is given as follows:

The Gross profit = Sales - purchases + closing inventory-Inventory at beginning

The Gross profit = $980,000-540,000+280,000-280,000 = $440,000

(2) The Comparative income statement to show the effect of error in cost of goods sold of vibrant company is shown below:

Particular 2016 2017 2018 3 years total

Sales $980,000 $980,000 $980,000 $2,940,000

Cost of goods sold

Purchases $540,000 $540,000 $540,000 $1,620,000

add : Beginning inventory:

$280,000 $260,000 $280,000 280,000

Less: Closing inventory:

($260,000) ($280,000) (280,000) (280,000)

Total Cost of goods sold:

$560,000 $520,000 $540,000 $540,000

Gross profit $420,000 $460,000 $440,000 $440,000

For this error in inventory it had an effect on both years 2016 and 2017 because closing inventory of previous year will be opening inventory of the subsequent year.