Question

Please complete all of P6-31A

OFT LUN! Learning Objectives 5, 6 2. 2017, overstated $7,000 P 6-31A Correcting inventory errors over a three-year period and computing inventory turnover and days' sales in inventory Lake Air Carpets's books show the following data. In early 2018, auditors found the ending merchandise inventory for 2015 was understated by $6,000 and that the ending merchandise inventory for 2017 was overstated by $7,000. The ending merchandise inventory at December 31, 2016, was correct. 2015 2017 $ 208,000 2016 $ 164,000 $ 177,000 Net Sales Revenue Cost of Goods Sold: Beginning Merchandise Inventory Net Cost of Purchases Cost of Goods Available for Sale Less: Ending Merchandise Inventory Cost of Goods Sold Gross Profit Operating Expenses Net Income $ 21,000 140,000 161,000 33,000 $ 28,000 103,000 131,000 21,000 $ 39,000 91,000 130,000 28,000 128,000 80,000 52,000 $ 28,000 110,000 54,000 25,000 $ 29,000 102,000 75,000 35,000 40,000 $

Answer 1

1)

	2017		2016		2015
Net sales revenue		$208000		$164000		$177000
Cost of goods sold:
Beginning merchandise inventory	$21000		$34000		$39000
Net cost of purchases	140000		103000		91000
Cost of goods available for sale	161000		137000		130000
Less: Ending merchandise inventory	26000		21000		34000
Cost of goods sold		135000		116000		96000
Gross profit		73000		48000		81000
Operating expenses		52000		25000		35000
Net income		$21000		$23000		$46000

Ending inventory of 2015= $28000+6000= $34000

Corrected ending inventory of 2015 is the beginning inventory of 2016

Ending inventory of 2017= $33000-7000= $26000

2)

2017	overstated	(28000-21000)= $7000
2016	overstated	(29000-23000)= $6000
2015	understated	(46000-40000)= $6000

3) Inventory turnover ratio= Cost of goods sold/Average inventory

Days' sales in inventory= 365 days/Inventory turnover ratio

2017

Average inventory= ($21000+26000)/2= $23500

Inventory turnover ratio= $135000/23500= 5.74 times

Days' sales in inventory= 365 days/5.74= 63.59 days

2016

Average inventory= ($34000+21000)/2= $27500

Inventory turnover ratio= $116000/27500= 4.22 times

Days' sales in inventory= 365 days/4.22= 86.49 days

2015

Average inventory= ($39000+34000)/2= $36500

Inventory turnover ratio= $96000/36500= 2.63 times

Days' sales in inventory= 365 days/2.63= 138.78 days