P6-4B - Analysis of Inventory Errors Watson Company's financial statements show the following. The company recently discovered that in making physical counts of inventory, it had made the following errors: Inventory on December 31, 2010, is overstated by $70,000, and inventory on December 31, 2011, is understated by $55,000. For Year Ended December 31 2010 2011 2012 (@) Cost of goods sold ... (b) Net profit .... (c) Total current assets .. (d) Total equity $ 655,000 225,000 1,251,000 1,387,000 $ 957,000 277,000 1,360,000 1,520,000 $ 799,000 244,000 1,200,000 1,250,000 Required 1. For each key financial statement figure-(a), (b), (c), and (d) above-prepare a table similar to the following to show the adjustments necessary to correct the reported amounts. Figure: - 2010 2011 2012 Reported amount. Adjustments for: 12/31/2010 error ..... 12/31/2011 error Corrected amount ... Analysis Component 2. What is the error in total net profit for the combined three-year period resulting from the inventory errors? Explain. 3. Explain why the overstatement of inventory by $70,000 at the end of 2010 results in an overstatement of equity by the same amount in that year