Question

Navajo Company’s financial statements show the following. The company recently discovered that in making physical counts of inventory, it had made the following errors: Year 1 ending inventory is understated by $66,000, and Year 2 ending inventory is overstated by $36,000.

For Year Ended December 31		Year 1		Year 2		Year 3
(a)	Cost of goods sold	$	741,000	$	971,000	$	806,000
(b)	Net income		284,000		291,000		266,000
(c)	Total current assets		1,263,000		1,376,000		1,246,000
(d)	Total equity		1,403,000		1,596,000		1,261,000

Required:
1. For each key financial statement figure—(a), (b), (c), and (d) below—prepare a table to show the adjustments necessary to correct the reported amounts.
2. What is the total error in combined net income for the three-year period resulting from the inventory errors?

Answer 1

ans 1
Cost of Good sold
	Year 1	Year 2	Year 3
Reported amount	$741,000	971000	806000
Adjustment for Year 1	-66000	66000
Year 2	0	36000	-36000
Corrected amt	$675,000	$1,073,000	$770,000
Net Income
	Year 1	Year 2	Year 3
Reported amount	$284,000	291000	266000
Adjustment for Year 1	66000	66000
Year 2	0	-36000	36000
Corrected amt	$350,000	$321,000	$302,000
Total current assets
	Year 1	Year 2	Year 3
Reported amount	$1,263,000	1376000	1246000
Adjustment for Year 1	66000	-66000
Year 2	0	-36000	36000
Corrected amt	$1,329,000	$1,274,000	$1,282,000
Total equity
	Year 1	Year 2	Year 3
Reported amount	$1,403,000	1596000	1261000
Adjustment for Year 1	66000	-66000
Year 2	0	-36000	36000
Corrected amt	$1,469,000	$1,494,000	$1,297,000
ans 2
Total error is $66000-36000	$30,000