How much did these corrections add to, or take away from, Oriental Rugs’ total net income over the…

(Correcting inventory errors over a 3-year period) The accounting records of Oriental Rugs show these data (in thousands): Auditors discovered that the ending inventory for 2005 was overstated by $100 thousand and that the ending inventory for 2006 was understated by $50 thousand. The ending inventory at December 31, 2007, was correct.

Oriental Rugs

(Amounts in thousands)

2007

2006

2005

Net sales revenue

$1,400

$1,200

$1,100

Cost of goods sold:

Beginning inventory

$ 400

$ 300

$ 200

Purchases

800

700

600

Goods available

1,200

1,000

800

Less ending inventory

(500)

(400)

(300)

Cost of goods sold

700

600

500

Gross profit

700

600

600

Total operating expenses

500

430

450

Net income

$ 200

$ 170

$ 150

Required

1. Show correct income statements for each of the 3 years.

2. How much did these corrections add to, or take away from, Oriental Rugs’ total net income over the 3-year period? How did the corrections affect the trend of net income?

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