Analyzing the Effect of an Inventory Error Disclosed in an Actual Note to a Financial Statement Several years ago, the financial statements of Gibson Greeting Cards, now part of American Greetings, contained the following note:
On July 1, the Company announced that it had determined that the inventory . . . had been overstated. . . . The overstatement of inventory . . . was $8,806,000.
Gibson reported an incorrect net income amount of $25,852,000 for the year in which the error occurred and the income tax rate was 39.3 percent.
Required:
1. Compute the amount of net income that Gibson reported after correcting the inventory error. Show computations.
2. Assume that the inventory error was not discovered. Identify the financial statement accounts that would have been incorrect
(a) For the year the error occurred and
(b) For the subsequent year. State whether each account was understated or overstated.