IBM had inventories of $2.6 billion at December 31, 2011, and $2.5 billion a year earlier.

1. Suppose the beginning inventory for fiscal 2011 had been overstated by $20 million because of errors in physical counts. There were no other inventory errors. Which items in the financial statements would be incorrect and by how much? Use O for overstated, U for understated, and N for not affected. Assume a 40% tax rate and state dollar amounts in millions.

2. What is the dollar effect of the inventory error on retained earnings at the end of fiscal 2011 and2010?

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Effect on Fiscal Year 2011 2010 0 by $20 N Beginning inventory Ending Inventory Cost of sales Gross profit Income before taxes on income Taxes on income Net income