Chapter 6, Problem 6.10E

(a)

To determine

Periodic Inventory System: It is a system in which the inventory is updated in the accounting records on a periodic basis such as at the end of each month, quarter or year. In other words, it is an accounting method which is used to determine the amount of inventory at the end of each accounting period.

Income Statement: The income statement is that financial statement which shows the net income (or loss) of the Company. In the income statement, to calculate the net income, all expenses incurred by the Company are deducted from the total revenue of the Company.

Gross Profit: It is that profit which is computed by deducting Cost of goods sold from the net sales (Sales after deducting Sales Return and allowances, Sales Discounts).

To prepare: The correct income statement for 2 years.

(b)

To determine

To identify: The cumulative effect of the inventory error on total gross profit for the 2 years.

(c)

To determine

To prepare: A letter to explain the nature of inventory error and its effect on the financial statements of the company.