Correcting inventory errors over a three-year period [15-20 min]Peaceful Carpets’ books sh...

Correcting inventory errors over a three-year period [15-20 min]

Peaceful Carpets’ books show the following data. In early 2013, auditors found that the ending inventory for 2010 was understated by $4,000 and that the ending inventory for 2012 was overstated by $5,000. The ending inventory at December 31, 2011, was correct.

Requirements

1. Prepare corrected income statements for the three years.

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2. State whether each year’s net income—before your corrections—is understated or overstated and indicate the amount of the understatement or overstatement.