1. 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

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

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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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