Doubletree 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, 2010, is understated by $50,000, and inventory on December 31, 2011, is overstated by $20,000.
|
For Year Ended December 31 |
2010 |
2011 |
2012 |
|
|
(a) |
Cost of goods sold |
$ 725,000 |
$ 955,000 |
$ 790,000 |
|
(b) |
Net income |
268,000 |
275,000 |
250,000 |
|
(c) |
Total current assets |
1,247,000 |
1,360,000 |
1,230,000 |
|
(d) |
Total equity |
1,387,000 |
1,580,000 |
1,245,000 |
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: |
2010 |
2011 |
2012 |
|
Reported amount |
|
|
|
|
Adjustments for: 12/31/2010 error |
|
|
|
|
12/31/2011 error |
|
|
|
|
Corrected amount |
|
|
|
2. What is the error in total net income for the combined three year period resulting from the inventory errors? Explain.
3. Explain why the understatement of inventory by $50,000 at the end of 2010 results in an understatement of equity by the same amount in that year.