An examination of the financial records of Lanal Company on December 31, 1998, disclosed the following with regard to merchandise inventory for 1998 and prior years:

1. December 31, 1994, inventory was correct.

2. December 31,1995 , inventory was overstated \(\$ 200,000\).

3. December 31,1996 , inventory was overstated \(\$ 100,000\).

4. December 31, 1997, inventory was understated \(\$ 220,000\).

5. December 31, 1998, inventory was correct.

The reported net income for each year was:

Required

a. Prepare a schedule of corrected net income for each of the four years-1995-1998.

b. What error(s) would have been included in each December 31 balance sheet? Assume each year's error is independent of the other years' errors.

c. Comment on the implications of your corrected net income as contrasted with reported net income.

Transcribed Image Text:

1995 1996 $384,000 WWW 544,000 1997. 670,000 1998. 846,000