Badger Company had $1,060,000 of sales in each of three consecutive years 2012–2014, and it purchased merchandise costing $580,000 in each of those years. It also maintained a $360,000 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 2012 that caused its year-end 2012 inventory to appear on its statements as $340,000 rather than the correct $360,000. Prepare comparative income statements to show the effect of this error on the company's cost of goods sold and gross profit for each of the years 2012−2014.

COGS  more in 2012 less in 2013

Gross Profit Less in 2012 more in 2013

Explanation:

Badger Company

Comparative Income Statements

                                              2012                  2013                 2014

Sales                               $1,060,000        $1,060,000         $1,060,000

Beginning Inventory     $360,000           $340,000              $360,000

Add purchases              $580,000            $580,000             $580,000

Less Ending                  $340,000             $360,000              $360,000

Cost Of Goods Sold     $600,000           $ 560,000                $580,000

Gross Profit                 $ 460,000            $ 500,000               $480,000

The company's gross profit would be understated in 2012 by $ 20,000 and  overstated in 2013 by $ 20,000.  This $ 20,000 amount is equal to the the difference in the amount of the wrong inventory entry and the correct ending inventory. However the company will have regular profit in the third year. The wrong entry would have no effect in the third year.

The Cost of Goods Sold would be overstated both in 2012 by $ 20,000 and understated in 2013 by $ 20,000. The Cost of Goods Sold will show no effect  of wrong entry in the third year.