The income statements for Picard Company for the three years ending in 2009 appear below:

During 2009, Picard discovered that the 2007 ending inventory had been misstated due to the following two transactions being recorded incorrectly:
a. Inventory costing $25,000 that was returned to the manufacturer (a purchase return) was not recorded and included in ending inventory.
b. A credit purchase of inventory made on 8/30/2007 for $15,000 was recorded twice. The goods were shipped F.O.B. shipping point and were shipped on 9/5/2007.

Required:
1. Was ending inventory for 2007 overstated or understated? By how much?
2. Prepare correct income statements for all three years.
3. Did the error in 2007 affect cumulative net income for the three-year period?
Explain your response.
4. Why was the 2009 net incomeunaffected?

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2008 2007 Sales revenue Cost of goods sold Gross margin Operating expense Income from operations Other expenses Income before taxes Income tax expense (34%) Net income $1,168,500 785,800 382,700 162,500 $ 220,200 73,500 $ 146,700 49,878 $ 96,822 $998,400 675,450 $322,950 142,800 $180,150 58,150 $975,300 659,800 $315,500 155,300 $160,200 54,500 $105,700 35,938 $ 69.762 450 41,480 $ 80,520