The income statement for Sherwood Company summarized for a four-year period shows the following:

An audit revealed that in determining these amounts, the ending inventory for 2004 was overstated by $20,000. The company uses a periodic inventory system.
Required: 1. Recast these income statements on a correct basis. 2. Did the error affect cumulative net income for the four-year period? Explain. 3. What effect would the error have had on the income tax expense assuming a 30 percent average rate?

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2003 2004 2005 2006 Sales revenue $2,000,000 $2,400,000 $2,500,000 $3,000,000 Cost of goods sold 1,400,000 1,630,000 1,780,000 2.100.000 Gross profit 600,000 770.000 720,000 900,000 Expenses 450,000 500,000 520.000 550,000 Pretax income 150,000 270,000 200,000 350,000 Income tax expense (30%) 45,000 81,000 60,000 105.000 Net income $ 105,000 $ 189,000 $ 140,000 $ 245.000