Question

Learning Objectives 5, 6 P6-31A Correcting inventory errors over a three-year period and computing inventory turnover and days' sales in inventory Empire State Carpets's books show the following data. In early 2020, auditors found that the ending merchandise inventory for 2017 was understated by $8,000 and that the ending merchandise inventory for 2019 was overstated by $9,000. The ending mer chandise inventory at December 31, 2018, was correct. 2. 2019, overstated $9,000 2019 2018 2017 Net Sales Revenue Cost of Goods Sold: $220,000 $162,000 176,000 Beginning Merchandise Inventory$ 22,000 Net Cost of Purchases Cost of Goods Available for Sale Less: Ending Merchandise Inventory Cost of Goods Sold $ 29,000 90,000 119,000 22,000 46,000 76,000 122,000 29,000 132,000 154,000 Gross Profit Operating Expenses Net Income 122,000 98,000 72,000 $26,000 97,000 65,000 38,000 $ 27,000 93,000 83,000 48,000 S 35,000

Answer 1

1.

Working for Ending Inventory:	2019	2018	2017
Incorrect Merchandise Inventory	32000	22000	29000
Under/(Over) statement	-9000	0	8000
Correct Merchandise Inventory	23000	22000	37000

Corrected Income Statement is as follows:

	2019		2018		2017
Net Sales Revenue		220000		162000		176000
Cost of Goods Sold:
Beginning Merchandise inventory	22000		37000		46000
Net Cost of Purchases	132000		90000		76000
Cost of Goods available for sale	154000		127000		122000
Less Ending Merchandise inventory	23000		22000		37000
Cost of Goods Sold		131000		105000		85000
Gross Profit		89000		57000		91000
Operating Expenses		72000		38000		48000
Net Income		17000		19000		43000

2. Net Income for 2019 is overstated by $9,000, for 2018, it is overstated by $8,000 and for 2017, it is understated by $8,000 as shown below:

Corrected Net Income		17000		19000		43000
Incorrect Net Income		26000		27000		35000
Under/(Over) statement		-9000		-8000		8000

3.

Inventory turnover = Cost of Goods sold / Average inventory

Average Inventory = (Beginning inventory+Closing inventory) / 2

Days sales in inventory = No. of days in a year / Inventory turnover

Inventory turnover and days sales in inventory calculation is shown below:

	2019	2018	2017
Cost of Goods Sold(a)	131000	105000	85000
Opening inventory(b)	22000	37000	46000
Closing inventory(c)	23000	22000	37000
Average inventory(d=[b+c]/2)	22500	29500	41500
Inventory Turnover(e=a/d)	5.82	3.56	2.05
Days in a year(f)	365	365	365
Days’ sales in inventory(g=f/e)	62.69	102.55	178.21