05 Jan Janet Chao, accountant of Seaward Electronics Ltd.
Janet Chao, accountant of Seaward Electronics Ltd., learned that Seaward Electronics s $24 million cost of inventory at the end of last year was overstated by $3.0 million. She notified the company president, Eric Moffat, of the accounting error and the need to alert the company s lenders that last year s reported net income was incorrect. Moffat explained to Chao that there is no need to report the error to lenders because the error will counterbalance this year: This year s error will affect this year s net income in the opposite direction of last year s error. Even with no correction, Moffat reasons, net income for both years combined will be the same whether or not Seaward Electronics corrects its errors. Required 1. Was last year s reported net income of $37.0 million overstated, understated, or correct? What was the correct amount of net income last year? 2. Is this year s net income of $41 million overstated, understated, or correct? What is the correct amount of net income for the current year? 3. Whose perspective is better, Chao s or Moffat s? Give your reason. Consider the trend of reported net income both without the correction and with the correction.
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