ACC 281 E6-12 - Staley Watch Company reported the following...

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Staley Watch Company reported the following income statement data for a 2-year period. 2008 2009 2008 2009 Sales 210,000 250,000 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 49,000 56,000 Staley uses a periodic inventory system. The inventories at January 1, 2008, and December 31, 2009, are correct. However, the ending inventory at December 31, 2008, was overstated $5,000. Instructions (a) Prepare correct income statement data for the 2 years. (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 Staley Company what has happened—i.e., the nature of the error and its effect on the financial statements. A.) 2008 2009 Incorrect Correct Incorrect Correct Sales 210,000 210,000 250,000 250,000 Cost of goods sold Beginning Inventory 32,000 32,000 44,000 39,000 Cost of goods purchased 173,000 173,000 202,000 202,000 Cost of goods available for sale 205,000 205,000 246,000 241,000 Ending Inventory 44,000 39,000 52,000 52,000 Cost of Goods Sold 161,000 166,000 194,000 189,000 Gross Profit 49,000 44,000 56,000 61,000 B.) There is no cumulative effect on total gross because the total incorrect data (49,000 + 56,000= 105
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