E7-18 (Algo) Analyzing the Effect of an Inventory Error Disclosed in an Actual Note to a Financial Statement LO7-7 Several years ago, the financial statements of Montgomery Greeting Cards, now part of Nation Salutations, contained the following note: On July 1, the Company announced that it had determined that the inventory ... had been overstated. ... The overstatement of inventory ... was $8,896,000. Montgomery Greeting Cards reported an incorrect net income amount of $25,892,000 for the year in which the error occurred and the income tax rate was 30.30 percent. Required: 1. Compute the amount of net income that Montgomery Greeting Cards reported after correcting the inventory error. 2. Assume that the inventory error was not discovered. Identify the financial statement accounts that would have been incorrect (a) for the year the error occurred and (b) for the subsequent year. State whether each account was understated, overstated, or had no effect. Complete this question by entering your answers in the tabs below. Required 1 Required 2 Compute the amount of net income that Montgomery Greeting Cards reported after correcting the inventory error. Corrected net income Required 1 Required 2 Assume that the inventory error was not discovered. Identify the financial statement accounts that would have been incorrect (a) for the year the error occurred and (b) for the subsequent year. State whether each account was understated, overstated, or had no effect. Account Year of Error Subsequent Year Beginning inventory Cost of goods sold Ending inventory Income tax expense Net income Retained earnings Taxes payable