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 $67,000, and Year 2 ending inventory is overstated by $37,000.

For Year Ended December 31		Year 1		Year 2		Year 3
(a)	Cost of goods sold	$	742,000	$	972,000	$	807,000
(b)	Net income		285,000		292,000		267,000
(c)	Total current assets		1,264,000		1,377,000		1,247,000
(d)	Total equity		1,404,000		1,597,000		1,262,000

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	$742,000	972000	807000
Adjustment for Year 1	-67000	67000
Year 2	0	37000	-37000
Corrected amt	$675,000	$1,076,000	$770,000
Net Income
	Year 1	Year 2	Year 3
Reported amount	$285,000	292000	267000
Adjustment for Year 1	67000	67000
Year 2	0	-37000	37000
Corrected amt	$352,000	$322,000	$304,000
Total current assets
	Year 1	Year 2	Year 3
Reported amount	$1,264,000	1377000	1247000
Adjustment for Year 1	67000	-67000
Year 2	0	-37000	37000
Corrected amt	$1,331,000	$1,273,000	$1,284,000
Total equity
	Year 1	Year 2	Year 3
Reported amount	$1,404,000	1597000	1262000
Adjustment for Year 1	67000	-67000
Year 2	0	-37000	37000
Corrected amt	$1,471,000	$1,493,000	$1,299,000
ans 2
Total error is $67000-37000	$30,000
If any doubt please comment