Question:Antique Carpets’s books show the following data. In early 2020, auditors found that the ending merchandise inventory for 2017 was understated by \(8,000 and that theending merchandise inventory for 2019 was overstated by \)9,000. The ending merchandiseinventory at December 31, 2018, was correct.

	2019	2018	2017
Net Sales Revenue	\( 212,000	\) 161,000	\( 170,000
Cost of Goods Sold:
Beginning Merchandise Inventory	\)22,000	\(28,000	\)41,000
Net cost of purchase	131,000	100,000	86,000
Cost of goods available for sale	153,000	128,000	127,000
Less: Ending Merchandise Inventory	34,000	22,000	28,000
Cost of goods sold	119,000	106,000	99,000
Gross Profit	93,000	55,000	71,000
Operating Expenses	63,000	28,000	39,000
Net Income	\( 30,000	\) 27,000	$ 32,000

Requirements

1. Prepare corrected income statements for the three years.
2. State whether each year’s net income—before your corrections—is understated oroverstated, and indicate the amount of the understatement or overstatement.

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

Step by step solution

01

Correct Income statement

	2019	2018	2017
Net Sales Revenue	$ 212,000	$ 161,000	$ 170,000
Cost of Goods Sold:
Beginning Merchandise Inventory	$22,000	$36,000	$41,000
Net cost of purchase	131,000	100,000	86,000
Cost of goods available for sale	153,000	136,000	127,000
Less: Ending Merchandise Inventory	25,000	22,000	36,000
Cost of goods sold	128,000	114,000	91,000
Gross Profit	84,000	47,000	79,000
Operating Expenses	63,000	28,000	39,000
Net Income	$ 21,000	$ 19,000	$ 40,000

02

Inventory turnover

$$\begin{gathered} For2019=\frac{Costofgoodssold}{AverageInventory} \\ =\frac{\$128,000}{\frac{\$22,000+\$25,000}{2}} \\ =\frac{\$128,000}{\$23,500} \\ =5.45 \end{gathered}$$

$$\begin{gathered} For2018=\frac{Costofgoodssold}{AverageInventory} \\ =\frac{\$114,000}{\frac{\$36,000+\$22,000}{2}} \\ =\frac{\$114,000}{\$29,000} \\ =3.93 \end{gathered}$$

$$\begin{gathered} For2017=\frac{Costofgoodssold}{AverageInventory} \\ =\frac{\$91,000}{\frac{\$41,000+\$36,000}{2}} \\ =\frac{\$91,000}{\$38,500} \\ =2.36 \end{gathered}$$

03

 Step 3: Days’ sales in inventory

$$\begin{gathered} For2019=\frac{365}{Inventoryturnover} \\ =\frac{365}{5.45} \\ =67days \end{gathered}$$

$$\begin{gathered} For2018=\frac{365}{Inventoryturnover} \\ =\frac{365}{3.93} \\ =92.87days \end{gathered}$$

$$\begin{gathered} For2017=\frac{365}{Inventoryturnover} \\ =\frac{365}{2.36} \\ =154.66 \end{gathered}$$

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