Chapter 5, Problem 6PSA

Analysis of inventory errors $\text{A}2$
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 $56,000 and Year 2 ending inventory is overstated by $20,000.

Required

1. For each key financial statement figure (a),(b),(c), and (d) above-prepare a table similar to the following to show the adjustments necessary to correct the reported amounts.

Check (1) Corrected net income: Year 1, $286,000; Year 2, $209,000; Year 3, $261,000

2. What is the total error in combined net income for the three-year period resulting from the inventory errors? Explain.