Question: Doubletree 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, 2010, is understated by $50,000, and inventory on December 31, 2011, 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.
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 $50,000 at the end of 2010 results in an understatement of equity by the same amount in that year.