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Correct ending inventory is $20,000, but a missed item causes only $19,500 to be reported. With sales of $200,000 and correct cost of sales of $80,000, what is the reported gross profit after this error?
A$119,500
B$120,000
C$120,500
D$200,000
Answer & Solution
Correct answer: A. $119,500
1. The $500 understatement of ending inventory adds $500 to cost of merchandise sold.
2. Reported cost of sales = $\$80,000 + \$500 = \$80,500$.
3. Gross profit = sales - cost of sales = $\$200,000 - \$80,500$.
4. Gross profit = $\$119,500$.
5. Rule out $\$120,500$: that would result from overstating, not understating, inventory.
_Source: Jonick, Principles of Financial Accounting (CC BY-SA 4.0), §4.1.4 "Physical Inventory Count", p.126_
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