Question

The net income per books of Russell Industries Limited was determined without any knowledge of the following errors. The 2012 year was Russell's first year in business. No dividends have been declared or paid.

Year	Net Income per Books	Error in Ending Inventory
2012	$50,000	Overstated	$ 5,000
2013	52,000	Overstated	9,000
2014	54,000	Understated	11,000
2015	56,000	No error
2016	58,000	Understated	2,000
2017	60,000	Overstated	10,000

Instructions

(a)  

Prepare a work sheet to show the adjusted net income figure for each of the six years after taking the inventory corrections into account.

(b)  

Prepare a schedule that indicates both the original retained earnings balance reported at the end of each year and the corrected amount.

(c)  

Consider the trends in the increase in income from 2012 to 2017 as originally reported and as revised after the corrections. Would you suspect that the income is being manipulated by adjusting the ending balance in the inventory account?

Answer 1