Blossom Company reported the following income statement data

Blossom Company reported the following income statement data for the years ended December 31: Sales Cost of goods sold Gross profit 2017 $545,000 460,000 $85,000 2016 $500,000 460,000 $40,000 The inventories at January 1, 2016, and December 31, 2017, are correct. However, the ending inventory at December 31, 2016, was understated by $27,000. Prepare the correct income statement up to gross profit tor the two years. BLOSSOM COMPANY Income Statement (Partial) 2017 2016 LINK TO TEXT What is the combined effect of the inventory error on total gross profit for the two years? Combined effect of the inventory error LINK TO TEXT

Solution

when ending inventory is understated ,the cost of goods solds is overstated thus the net income will be understated by $27,000. the effect will be reversed on beginning inventory in 2017 Blossom company 2017 2016 Sales 545,000 500,000 cost of goods sold 487000 433000 Gross profit 58,000 67,000 combined effect of the inventory error $0