PB7-5 (Supplement 7B) Analyzing and Interpreting the Effects of Inventory Errors
ID: 2517491 • Letter: P
Question
PB7-5 (Supplement 7B) Analyzing and Interpreting the Effects of Inventory Errors [LO 7-S2]
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Spears & Cantrell announced inventory had been overstated by $40 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.
Spears & Cantrell announced inventory had been overstated by $40 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.
PB7-5 (Supplement 7B) Analyzing and Interpreting the Effects of Inventory Errors [LO 7-S2] Spears & Cantrell announced inventory had been overstated by $40 at the end of its second quarter. The error wasnt 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 01 03 $3,750 $4,250 S5,000 Cost of Goods Sold 2,550 2,850 3,440 Net Sales Gross Profit $1,200 $1,400 $1,560 Required: 1. Restate the income statements to reflect the correct amounts, after fixing the inventory error SPEARS &CANTRELL; COMPANY Income Statements (Corrected) Q1 Q2 03 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 02 Q3 Before Correction After Correction 2-b. Do the results lend confidence to your corrected amounts? Yes NoExplanation / Answer
Answer for 1)
Income statement of spears and Cantrell company(corrected)
The formula for Cost Of Goods Sold:
Opening stock+puchases-closing stock
*Here as Closing stock is over stated it results in understating the Cost of goods sold and hence $40 must be added.
**Here closing stock of previous year is overstated which means current opening is overstated and hence $40 must be reduced from Cost Of Goods Sold.
Answer for 2a)
Gross profit percentage:(gross profit/sales)×100%
32%
[I.e $(1200/3750)×100%
32.94%
[I.e $(1400/4250)×100%]
31.2%
[I.e $(1560/5000)×100%]
32%
[No changes needed]
32%
[ I.e $(1360/4250)×100%]
32%
[I.e $(1600/5000)×100%]
Answer for 2b)
The results lend confidence as the gross profit percentage is equal for all three quarters after corrections.
Particulars Q1[$] Q2[$] Q3[$] Net sales 3750 4250 5000 Cost of goods sold 2550 2890* 3400** Gross profit 1200 1360 1600Related Questions
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