The following highly condensed income statements and balance sheets are available for Budget Stores for a two-year period. (All amounts are stated in thousands of dollars.)

Before releasing the 2012 annual report, Budget's controller learns that the inventory of one of the stores (amounting to $600,000) was inadvertently omitted from the count on December 31, 2011. The inventory of the store was correctly included in the December 31, 2012, count.

Required

1. Prepare revised income statements and balance sheets for Budget Stores for each of the two years. Ignore the effect of income taxes.

2. If Budget did not prepare revised statements before releasing the 2012 annual report, what would be the amount of overstatement or understatement of net income for the two-year period? What would be the overstatement or understatement of retained earnings at December 31, 2012, if revised statements were not prepared?

3. Given your answers in part (2), does it matter if Budget bothers to restate the financial statements of the two years to rectify the error? Explain your answer.

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Income Statements 2012 2011 $20,000 Revenues $15,000 Cost of goods sold Gross profit Operating expenses 13,000 10,000 $ 7,000 $ 5,000 3,000 2,000 $ 4,000 $ 3,000 Net income Balance Sheets December 31, 2012 December 31, 2011 $ 1,700 4,200 $ 1,500 Cash Inventory 3,500 Other current assets 2,500 2,000 Long-term assets 15,000 $23,400 14,000 Total assets $21,000