DE9-15 Barbara Warren, staff accountant of Shimeido Fragrance Co.. learned that Shimeido's $4 million cost of inventory at the end of last year was understated by $2 mil- lion. She notified the company president of the need to alert Shimeido's lenders that last year's reported net income was incorrect. Akiro Luhara, president of Shimeido, explained to Warren that there is no need to report the error to lenders because the error will coun- terbalance this year. This year's error will affect this year's net income in the opposite direc- tion of last year's error. Even with no correction. Luhara reasons that net income for both years combined will be the same whether or not Shimeido corrects its error. 1. Was last year's reported net income of $6.3 million overstated, understated, or correct? What was the correct amount of net income last year? 2. Is this year's net income of $7 million overstated, understated, or correct? What is the correct amount of net income for the current year? 3. Whose perspective is better, Warren's or Luhara's? Give your reason. Consider the trend of reported net income both without the correction and with the correction.