Inventory Error The following highly condensed income statements and balance sheets are available for Budget Stores for a two-year period. (All amounts are stated in thousands of dollars.)

Income Statements 2010 2009 Revenues $20,000 $15,000 Cost of goods sold 13,000 10,000 Gross profi t $ 7,000 $ 5,000 Operating expenses 3,000 2,000 Net income $ 4,000 $ 3,000 Balance Sheets December 31, 2010 December 31, 2009 Cash $ 1,700 $ 1,500 Inventory 4,200 3,500 Other current assets 2,500 2,000 Long-term assets 15,000 14,000 Total assets $23,400 $21,000 Liabilities $ 8,500 $ 7,000 Capital stock 5,000 5,000 Retained earnings 9,900 9,000 Total liabilities and stockholders’ equity $23,400 $21,000 Before releasing the 2010 annual report, Budget’s controller learns that the inventory of one of the stores (amounting to $600,000) was inadvertently omitted from the count on December 31, 2009. The inventory of the store was correctly included in the December 31, 2010, count.

Required 1. Prepare revised income statements and balance sheets for Budget Stores for each of the two years. Ignore the effect of income taxes.
2. If Budget did not prepare revised statements before releasing the 2010 annual report, what would be the amount of overstatement or understatement of net income for the two-year period? What would be the overstatement or understatement of retained earnings at December 31, 2010, if revised statements were not prepared?
3. Given your answers in part (2), does it matter if Budget bothers to restate the fi nancial statements of the two years to rectify the error? Explain your answer.AppendixLO1