Inventory T/O & #days sales in inventory BUA111 Chp. 6: Part 2 Inventory Errors; Inventory T/O & #days sales in inventory Dr. keith D. Moon

Inventory Errors If ending inventory is overstated then COGS is understated, so need adjusting entry: COGS $ Merch. Inventory $ Dr. keith D. Moon

Inventory Errors (con’t.) If ending inventory is understated then COGS is overstated, so need adjusting entry: Merc. Inventory $ COGS $ Dr. keith D. Moon

Exercise 6-24 Do Exercise 6-24 which is a good exercise regarding inventory errors. This will assist you with the problem dealing with this issue on EXAM 3. Dr. keith D. Moon

E6-24: Solution (a) $ 14,000 Incorrect Merchandise Inventory (5,000)   $ 14,000 Incorrect Merchandise Inventory (5,000) Overstatement $ 9,000 Correct Merchandise Inventory : Dr. keith D. Moon

Solution: Exercise 6-24 (con’t.) Requirement 1 Corrected income statements: NATURAL BITE GROCERY Income Statements Years Ended June 30, 2017 and 2016   2017 2016 Sales Revenue $ 137,000 $ 122,000 Cost of Goods Sold: Beginning Merchandise Inventory $ 9,000(a) $ 13,000 Net Cost of Purchases 79,000 72,000 Cost of Goods Available for Sale 88,000 85,000 Less: Ending Merchandise Inventory 19,000 9,000 (a) Cost of Goods Sold 69,000 76,000 Gross Profit 68,000 46,000 Operating Expenses 30,000 Net Income $ 38,000 $ 27,000 Dr. keith D. Moon

Solution: Exercise 6-24 (con’t.) E6-24, cont. Requirement 2 Before correction, net income for the year ended June 30, 2017 is understated by $5,000 and net income for the year ended June 30, 2016 is overstated by $5,000. Calculations: (b) Calculated in Requirement 1.   Year Ended June 30, 2017 June 30, 2016 Incorrect net income $ 33,000 $ 32,000 Correct net income (b) (38,000) (27,000) Overstatement (understatement) of net income $ (5,000) $ 5,000 Dr. keith D. Moon

E6-25: Inventory T/O & days sales in inventory Average merchandise inventory = (Beginning merchandise inventory + Ending merchandise inventory) / 2   ($8,800 + $13,000) / 2 $10,900 E6-25 Requirement 1 Inventory turnover is 6.04 times for the year. Calculations: Average merchandise inventory = (Beginning merchandise inventory + Ending merchandise inventory) / 2   ($8,800 + $13,000) / 2 $10,900 Dr. keith D. Moon

E6-25: Inventory T/O & days sales in inventory (con’t.) Inventory turnover = Cost of goods sold / Average merchandise inventory   $65,800 / $10,900 6.04 times for the year Dr. keith D. Moon

Days’ sales in inventory E6-25 (con’t.) Days’ sales in inventory = 365 days / Inventory turnover   365 days / 6.04 times* 60.43 days Dr. keith D. Moon