Effects of an Inventory Error The statements of earnings for Picard Company for the three years ended in 2018 appear below.

During 2018, Picard discovered that the 2016 ending inventory had been misstated due to the following two transactions being recorded incorrectly.

a. Inventory costing \(\$ 37,000\) that was returned to the manufacturer (a purchase return) was not recorded. The items were included in ending inventory.

b. A credit purchase of inventory made on August 30, 2016, for \(\$ 12,800\) was recorded twice. The goods were shipped FOB shipping point and were shipped on September 5, 2016.
\section*{Required:}
1. Was ending inventory for 2016 overstated or understated? By how much?
2. Prepare correct statements of earnings for all three years.
3. CONCEPTUAL CONNECTION Did the error in 2016 affect cumulative net income for the three-year period? Explain your response.
4. CONCEPTUAL CONNECTION Why was the 2018 net income unaffected?
\section*{OBJECTIVE 89 Problem

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Sales revenue Cost of goods sold Gross margin Operating expense Income from operations Other expenses 2018 $1,168,500 2017 $ 998,400 2016 $ 975,300 (659,800) (785,800) (675,450) 382,700 322,950 315,500 (162,500) (142,800) (155,300) 220.200 180,150 160,200 (73,500) (58,150) (54,500) Income before taxes 146,700 122,000 105,700 Income tax expense (34%) (49.878) (41.480) (35,938) Net income $ 96.822 $ 80,520 $ 69,762