Navajo 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, 2012, is understated by $ 56,000, and inventory on December 31, 2013, is overstated by $ 20,000.

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.

Analysis Component
2. What is the error in total net income for the combined three- year period resulting from the inventory errors? Explain.
3. Explain why the understatement of inventory by $ 56,000 at the end of 2012 results in an understatement of equity by the same amount in thatyear.

  • CreatedNovember 26, 2013
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