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 $59,000, and Year 2 ending inventory is overstated by $29,000.

For Year Ended December 31		Year 1		Year 2		Year 3
(a)	Cost of goods sold	$	734,000	$	964,000	$	799,000
(b)	Net income		277,000		284,000		259,000
(c)	Total current assets		1,256,000		1,369,000		1,239,000
(d)	Total equity		1,396,000		1,589,000		1,254,000

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?

Complete this question by entering your answers in the tabs below.

• Required 1
• Required 2

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

	Error in total net income of three years

Answer 1

Cost of goods sold:	Year 1	Year 2	Year 3
Reported amount	$7,34,000	$9,64,000	$7,99,000
Adjustments for:
Year 1 error	-$59,000	$59,000	$0
Year 2 error	$0	$29,000	-$29,000
Corrected amount	$6,75,000	$10,52,000	$7,70,000
Net Income:	Year 1	Year 2	Year 3
Reported amount	$2,77,000	$2,84,000	$2,59,000
Adjustments for:
Year 1 error	$59,000	$59,000	$0
Year 2 error	$0	-$29,000	$29,000
Corrected amount	$3,36,000	$3,14,000	$2,88,000
Current Assets:	Year 1	Year 2	Year 3
Reported amount	$12,56,000	$13,69,000	$12,39,000
Adjustments for:
Year 1 error	$59,000	$59,000	$0
Year 2 error	$0	-$29,000	-$29,000
Corrected amount	$13,15,000	$13,99,000	$12,10,000
Total equity:	Year 1	Year 2	Year 3
Reported amount	$13,96,000	$15,89,000	$12,54,000
Adjustments for:
Year 1 error	$59,000	$59,000	$0
Year 2 error	$0	-$29,000	-$29,000
Corrected amount	$14,55,000	$16,19,000	$12,25,000
Total error in Net Income is understatement of $30,000