Navajo Company’s year-end financial statements show the following.
The company recently discovered that in making physical counts of inventory, it had made the following errors: Year 1 ending inventory is understated by $56,000 and Year 2 ending inventory is overstated by $20,000.

Required
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.

2. What is the total error in combined net income for the three-year period resulting from the inventory errors? Explain.

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For Year Ended December 31 (a) Cost of goods sold.... (b) Net income..... (c) Total current assets (d) Total equity.... Year 1 $ 615,000 230,000 1,255,000 1,387,000 Year 2 $ 957,000 285,000 1,365,000 1,530,000 Year 3 $ 780,000 241,000 1,200,000 1,242,000