Response to the following problem:
The following partial income statements have been prepared for Darwin's Video Inc.:
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|
2016
|
2017
|
2018
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|
Sales
|
|
$3,000
|
|
$7,000
|
|
$10,000
|
|
Cost of goods sold
|
|
|
|
|
|
|
|
Opening inventory
|
$1,000
|
|
$ 4,000
|
|
$ 8,000
|
|
|
Purchases
|
5,000
|
|
9,000
|
|
11,000
|
|
|
Goods available for sale
|
6,000
|
|
13,000
|
|
19,000
|
|
|
Ending inventory
|
4,000
|
|
8,000
|
|
12,000
|
|
|
Cost of goods sold
|
|
2,000
|
|
5,000
|
|
7,000
|
|
Gross profit
|
|
$1,000
|
|
$2,000
|
|
$3,000
|
Subsequent to the preparation of these income statements, two inventory errors were found:
(a) the 2016 ending inventory was overstated by $1,000 and
(b) the 2017 ending inventory was understated by $1,000.
Required:
1. Prepare corrected income statements for the three years, using the comparative format above.
2. What is your explanation for the difference in the 2017 gross profit?
3. Is the balance of retained earnings at the end of 2018 affected by the errors?.