Problem - Nikita 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, 2008, is understated by $56,000, and inventory on December 31, 2009, is overstated by $25,000.
For Year Ended December 31 2008 2009 2010
(a) Cost of goods sold.................... $6230,000 $955,000 $780,000
(b) Net income............................... 230,0000 275,000 250,000
(c) Total current assets................ 1,247,000 1,360,000 1,230,000
(d) Total equity............................. 1,387,000 1,580,000 1,245,000
REQUIRED
1. For each key financial figure - (a), (b), (c), and (d) above - prepare a table similar to the following the show the adjustments necessary to correct the reported amounts.
Figure: 2008 2009 2010
Report amount............................................
Adjustments for: 12/31/2008 error........
12/31/2009 error.......
Corrected amount.....................................
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 $56,000 at the end of 2008 results in an understatement of equity by the same amount in that year.