The accounting records of Timberlake Home Store show these data (in millions):

The shareholders are very happy with Timberlake’s steady increase in net income. However, auditors discovered that the ending inventory for 2016 was understated by $5 million and that the ending inventory for 2017 was understated by $8 million. The ending inventory at December 31, 2018, 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 Timberlake’s total net income over the three-year period? How did the corrections affect the trend of net income?

3. Will Timberlake’s shareholders still be happy with the company’s trend of net income? Explain.

Transcribed Image Text:

2018 2017 2016 Net sales revenue... $40 $37 $34 Cost of goods sold: $ 11 $ 10 $ 9 Beginning inventory Net purchases . Cost of goods available 29 27 25 . 40 37 34 Less ending inventory.. (12) (11) (10) .......... Cost of goods sold . 28 26 24 Gross profit. 12 11 10 . Operating expenses 3 3 $ 7 $ 9 Net income..