Chapter 6, Problem 6BP

Analysis of inventory errors A2

Hallam 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 overstated by $18,000 and Year 2 ending inventory is understated by $26,000.

For Year Ended December 31	Year 1	Year 2	1 Year 3
(a) Cost of goods sold	$207,200	$213,800	$197,030
(b) Net income	175,800	212,270	184,910
(c) Total current assets	276,000	277,500	272,950
(d) Total equity	314,000	315,000	346,000

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.

Figure:	Year 1		Year 2	Year 3
Reported amount.
Adjustments for: Year 1 error
Year 2 error
Corrected amount.

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