Spears & Cantrell announced inventory had been overstated by $90 at the end of i

Question

Spears & Cantrell announced inventory had been overstated by $90 at the end of its second quarter. The error wasn't discovered and corrected in the company's periodic inventory system until after the end of the third quarter. The following table shows the amounts that were originally reported by the company. Q3 Q1 $3,250 $3,750 $4,000 Q2 Net Sales Cost of Goods Sold 2,210 2,460 2,810 Gross Profit $1,040 $1,290 $1,190 Required 1. Restate the income statements to reflect the correct amounts, after fixing the inventory error. SPEARS & CANTRELL COMPANY Income Statements (Corrected) Q1 Q2 Q3 Net Sales Cost of Goods Sold Gross Profit 2-a. Compute the gross profit percentage for each quarter (a) before the correction and (b) after the correction. (Round your answers to the nearest whole percent.) Q1 Q2 Q3 Before Correction After Correction 2-b. Do the results lend confidence to your corrected amounts? O Yes O No

Explanation / Answer

1) Cost of goods sold = Beginning Inventory+Purchases-Ending Inventory

If ending inventory at the end of second quarter is overstated by $90, it means cost of goods sold of second quarter is understated by $90 and this also means that the beginning inventory of third quarter is also overstated which results in overstatement of Cost of goods sold of third quarter.

The corrected Cost of goods sold for Second Qtr = Incorrect COGS+$90

= $2,460+$90 = $2,550

The corrected cost of goods sold for third Qtr = Incorrect COGS-$90

= $2,810 - $90 = $2,720

The correct restated income statements are shown as follows:-

Spears & Cantrell Company

Income Statements (Corrected) (Amounts in $)

2-a) Calculation of gross profit percentage

2-b) As per after corrected figures, the gross profit rate is same for all the three quarters (i.e. 32% for all the three quarters). Thus the results calculated in part 2-a lend confidence to our corrected amounts. Therefore the answer is yes.

Particulars Q1 Q2 Q3 Net Sales 3,250 3,750 4,000 Less: Cost of Goods Sold (2,210) (2,550) (2,720) Gross Profit 1,040 1,200 1,280

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