Question

In: Accounting

Crane Company has a July 31 fiscal year end and uses a perpetual inventory system. The...

Crane Company has a July 31 fiscal year end and uses a perpetual inventory system. The records of Crane Company show the following data:

	2021	2020	2019
Income statement:
Sales	$350,000	$325,000	$360,000
Cost of goods sold	247,000	228,000	273,000
Operating expenses	70,000	70,000	70,000
Balance sheet:
Merchandise inventory	52,000	44,000	35,000

After its July 31, 2021, year end, Crane discovered two errors:

1.		At July 31, 2020, Crane had $10,000 of goods held on consignment at another company that were not included in the physical count.
2.		In July 2020, Crane recorded a $15,000 inventory purchase on account that should have been recorded in August 2020.

Prepare corrected income statements for Crane for the years ended July 31, 2019, 2020, and 2021.
Calculate the incorrect and correct inventory turnover ratios for 2020 and 2021. (Round answers to 2 decimal places, e.g. 52.75.)

	2020		2021
Incorrect inventory turnover		times		times
Correct inventory turnover

Expert Solution

Answer:

	2020		2021
Incorrect inventory turnover	5.77	Times	5.15	Times
Correct inventory turnover	8.44	Times	8.1	Times

Explanations:

Step 1: Calculation of corrected COGS and inventory

COGS 2020	228,000
Less: consignment inventory	10,000
Less: purchase of next year	15,000
Corrected COGS	$203,000

COGS 2021	247,000
Add: Purchase not recorded	15,000
	262,000

Merchandise inventory 2020	44,000
Less: consignment inventory	10,000
Less: purchase of next year	15,000
Corrected amount	19,000

Merchandise inventory 2021	52,000
Less: consignment inventory	10,000
Corrected amount	42,000

Step 2: Calculation of inventory turnover ratios

Inventory turnover ratio = COGS ÷ Average inventory

a.) Incorrect inventory turnover

2020:

= 228,000 ÷ (35,000 + 44,000 ÷ 2)

= 228,000 ÷ 39,500

= 5.77

2021:

=247,000 ÷ (44,000 + 52,000 ÷ 2 )

=247,000 ÷ 48,000

= 5.15

a.) correct inventory turnover

2020:

= 203,000 ÷ (35,000 + 19,000 ÷ 2)

= 228,000 ÷ 27,000

= 8.44

2021:

=262,000 ÷ (19,000 + 42,000 ÷ 2 )

=247,000 ÷ 30,500

= 8.1

ekkarill92 answered 2 years ago

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