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: Inventory on December 31, 2015, is understated by $63,000, and inventory on December 31, 2016, is overstated by $33,000.

For Year Ended December 31		2015		2016		2017
(a)	Cost of goods sold	$	738,000	$	968,000	$	803,000
(b)	Net income		281,000		288,000		263,000
(c)	Total current assets		1,260,000		1,373,000		1,243,000
(d)	Total equity		1,400,000		1,593,000		1,258,000

  
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. (Amounts to be deducted must be entered with a minus sign.)

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

Answer 1

A) Cost of Goods Sold:				2015	2016	2017
Reported Amount				738000	968000	803000
Adjustments for
December 2015 error				-63000	63000
December 2016 error					33000	-33000
Corrected Amount				675000	1064000	770000
B) Net Income				2015	2016	2017
Reported Amount				281000	288000	263000	832000
Adjustments for
December 2015 error				63000	-63000
December 2016 error					-33000	33000
Corrected Amount				344000	192000	296000	832000
C) Total Current Assets:				2015	2016	2017
Reported Amount				1260000	1373000	1243000
Adjustments for
December 2015 error				63000
December 2016 error					-33000
Corrected Amount				1323000	1340000	1243000
D) Total Equity				2015	2016	2017
Reported Amount				1400000	1593000	1258000
Adjustments for
December 2015 error				63000
December 2016 error					-33000
Corrected Amount				1463000	1560000	1258000
There is no change in the combined net income of 3 years as can be seen from calculation B.