The following highly condensed income statements and balance sheets are available for
Budget Stores for a two-year period. (All amounts are stated in thousands of dollars.)
Before releasing the 2008 annual report, Budget’s controller learns that the inventory of one of the
stores (amounting to $600,000) was inadvertently omitted from the count on December 31,
2007. The inventory of the store was correctly included in the December 31, 2008, count.
1. Prepare revised income statements and balance sheets for Budget Stores for each of the two
years. Ignore the effect of income taxes.
2. If Budget did not prepare revised statements before releasing the 2008 annual report, what
would be the amount of overstatement or understatement of net income for the two-year
period? What would be the overstatement or understatement of retained earnings at December
31, 2008, if revised statements were not prepared?
3. Given your answers in (2), does it matter if Budget bothers to restate the financial statements
of the two years to rectify the error? Explain your answer.