Question

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 merchandise inventory at December 31, 2018, was correct.

	2019	2018	2017
Net Sales Revenue	\( 220,000	\) 162,000	\( 176,000
Cost of Goods Sold:
Beginning Merchandise Inventory	\)22,000	\(29,000	\)46,000
Net cost of purchase	132,000	90,000	76,000
Cost of goods available for sale	154,000	119,000	122,000
Less: Ending Merchandise Inventory	32,000	22,000	29,000
Cost of goods sold	122,000	97,000	93,000
Gross Profit	98,000	65,000	83,000
Operating Expenses	72,000	38,000	48,000
Net Income	\( 26,000	\) 27,000	$ 35,000

Requirements

3. Compute the inventory turnover and days’ sales in inventory using the corrected income statements for the three years. (Round all numbers to two decimals.)

Short answer

Answer

2019 2018 2017

Inventory Turnover--------------- 5.82 3.6 2.05

Days’ sales in inventory-------- 62.71 101.38 178.05

Step-by-step solution

Correct Income statement

	2019	2018	2017
Net Sales Revenue	$ 220,000	$ 162,000	$ 176,000
Cost of Goods Sold:
Beginning Merchandise Inventory	$22,000	$37,000	$46,000
Net cost of purchase	132,000	90,000	76,000
Cost of goods available for sale	154,000	127,000	122,000
Less: Ending Merchandise Inventory	23,000	22,000	37,000
Cost of goods sold	131,000	105,000	85,000
Gross Profit	89,000	57,000	91,000
Operating Expenses	72,000	38,000	48,000
Net Income	$ 17,000	$ 19,000	$ 43,000

Inventory turnover

$$\begin{gathered} \mathbf{For}\mathbf{}\mathbf{2019}\mathbf{=}\frac{\mathbf{Cost}\mathbf{}\mathbf{of}\mathbf{}\mathbf{goods}\mathbf{}\mathbf{sold}}{\mathbf{Average}\mathbf{}\mathbf{Inventory}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\frac{{\displaystyle \frac{\mathbf{\$}\mathbf{131}\mathbf{,}\mathbf{000}}{\mathbf{\$}\mathbf{22}\mathbf{,}\mathbf{000}\mathbf{+}\mathbf{\$}\mathbf{23}\mathbf{,}\mathbf{000}}}}{\mathbf{2}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\frac{\mathbf{\$}\mathbf{131}\mathbf{,}\mathbf{000}}{\mathbf{\$}\mathbf{22}\mathbf{,}\mathbf{500}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{5}\mathbf{.}\mathbf{82} \\ \mathbf{For}\mathbf{}\mathbf{2018}\mathbf{=}\frac{\mathbf{Cost}\mathbf{}\mathbf{of}\mathbf{}\mathbf{goods}\mathbf{}\mathbf{sold}}{\mathbf{Average}\mathbf{}\mathbf{Inventory}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\frac{{\displaystyle \frac{\$105,000}{\$37,000+\$22,000}}}{\mathbf{2}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\frac{\mathbf{\$}\mathbf{105}\mathbf{,}\mathbf{000}}{\mathbf{\$}\mathbf{29}\mathbf{,}\mathbf{500}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{3}\mathbf{.}\mathbf{6} \\ \mathbf{For}\mathbf{}\mathbf{2017}\mathbf{=}\frac{\mathbf{Cost}\mathbf{}\mathbf{of}\mathbf{}\mathbf{goods}\mathbf{}\mathbf{sold}}{\mathbf{Average}\mathbf{}\mathbf{Inventory}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\frac{{\displaystyle \frac{\$85,000}{\$46,000+\$37,000}}}{\mathbf{2}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\frac{\mathbf{\$}\mathbf{85}\mathbf{,}\mathbf{000}}{\mathbf{\$}\mathbf{41}\mathbf{,}\mathbf{500}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{2}\mathbf{.}\mathbf{05} \end{gathered}$$

Days’ sales in inventory

$$\begin{gathered} \mathbf{For}\mathbf{}\mathbf{2019}\mathbf{=}\frac{\mathbf{365}}{\mathbf{Inventory}\mathbf{}\mathbf{turnover}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\frac{\mathbf{365}}{\mathbf{5}\mathbf{.}\mathbf{82}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{62}\mathbf{.}\mathbf{71} \\ \mathbf{For}\mathbf{}\mathbf{2018}\mathbf{=}\frac{\mathbf{365}}{\mathbf{Inventory}\mathbf{}\mathbf{turnover}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\frac{\mathbf{365}}{\mathbf{3}\mathbf{.}\mathbf{6}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{101}\mathbf{.}\mathbf{38} \\ \mathbf{For}\mathbf{}\mathbf{2017}\mathbf{=}\frac{\mathbf{365}}{\mathbf{Inventory}\mathbf{}\mathbf{turnover}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\frac{\mathbf{365}}{\mathbf{2}\mathbf{.}\mathbf{05}} \\ \mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{}\mathbf{=}\mathbf{178}\mathbf{.}\mathbf{05} \end{gathered}$$