EFFECTS OF AN INVENTORY ERROR The income statements for Picard Company for the three years ending in 2009 appear below:

2009 2008 2007 Sales revenue $1,168,500 $998,400 $975,300 Cost of goods sold 785,800 675,450 659,800 Gross margin $ 382,700 $322,950 $315,500 Operating expense 162,500 142,800 155,300 Income from operations $ 220,200 $180,150 $160,200 Other expenses 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 During 2009, Picard discovered that the 2007 ending inventory had been misstated due to the following two transactions being recorded incorrectly:

a. Inventory costing $25,000 that was returned to the manufacturer (a purchase return) was not recorded and included in ending inventory

b. A credit purchase of inventory made on 8/30/2007 for $15,000 was recorded twice.

The goods were shipped F.O.B. shipping point and were shipped on 9/5/2007.

Required:

. Was ending inventory for 2007 overstated or understated? By how much?

. Prepare correct income statements for all three years.

. Did the error in 2007 affect cumulative net income for the three-year period?

Explain your response.

. Why was the 2009 net income unaffected?