P6-68A. (Learning Objective 5: Correcting inventory errors over a three-year period) The accounting records of R.B. Video Sales show the data betow (in millions). The shareholders are very happy with R.B.’s steady increase in net income.

Auditors discovered that the ending inventory for 20X4 was understated by $3 million and that the ending inventory for 20X5 was also understated by $3 million. The ending inventory at December 31, 20X6, was correct.

Requirements 1. Show corrected Income Statements for each of the three years.
2. How much did these assumed corrections add to or take away from R.B.’s total net income over the three-year period? How did the corrections affect the trend of net income?
3. Will R.B.’s shareholders still be happy with the company’s trend of net income? Give the reason for your answer.

Net sales revenue. Cost of goods sold: Beginning inventory.. Net purchases.. Cost of goods available.. Less ending inventory.... Cost of goods sold Gross profit......... Operating expenses......................... Net income...... 29 35 20X6 $43 20X5 $ 5 $40 $ 4 20X4 $37 27 25 32 29 (6) (5) 28 26 15 14 13 7 7 7 $ 8 $ 6