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Financial & Managerial Accounting
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Short Answer

Vibrant Company had $850,000 of sales in each of three consecutive years 2016–2018, and it purchased merchandise costing $500,000 in each of those years. It also maintained a $250,000 physical inventory from the beginning to the end of that three-year period. In accounting for inventory, it made an error at the end of year 2016 that caused its year-end 2016 inventory to appear on its statements as $230,000 rather than the correct $250,000.

Determine the correct amount of the company’s gross profit in each of the years 2016–2018.

Correct gross profit for each year is $350,000.

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Step by Step Solution

Definition of Gross Profit

The profit calculated in the income statement after making adjustments for direct expenses from the sales revenue generated is known as gross profit.

Correct gross profit

Correct cost of goods sold each year:

Particular

2016

2017

2018

Opening Inventory

$250,000

$250,000

$250,000

Add: Purchases

500,000

500,000

500,000

Less: Closing inventory

(250,000)

(250,000)

(250,000)

Cost of goods sold

$500,000

$500,000

$500,000

Calculation of correct gross profit:

Particular

2016

2017

2018

Sales

$850,000

$850,000

$850,000

Less: Cost of goods sold

(500,000)

(500,000)

(500,000)

Gross profit

$350,000

$350,000

$350,000

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