Navajo Companys financial statements show the following. The company recently discovered that in making physical counts of

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, 2012, is understated by $ 56,000, and inventory on December 31, 2013, is overstated by $ 20,000.

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.

Analysis Component
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 $ 56,000 at the end of 2012 results in an understatement of equity by the same amount in thatyear.

Transcribed Image Text:

For Year Ended December 31 2012 2013 2014 (a) Cost of goods sold615,000 $ 957.000 (b) Net income 780,000 230,000 28000 241,000 Figure: 2012 2013 2014 Reported amount... Adjustments for: 12/31/2012 error 12/31/2013 error