Chapter 6, Problem 6.36BP

1.

To determine

Inventory error: It is the error to identify a mistake in physical count or in pricing qualities. It is also discovered in same accounting period.

To Prepare: The correct income statements for the three years.

2.

To determine

To State: Whether each year’s net income before corrections is understated or overstated.

3.

To determine

Inventory turnover ratio: This is a financial metric that is used to quantify the number of times inventory is used or sold during the accounting period. It is calculated by using the following formula:

$\text{Inventory turnover = }\frac{\text{Cost of goods sold}}{\text{Average inventory}}$

Days’ sales in inventory: Days’ sales in inventory are used to determine number of days a particular company takes to make sales of the inventory available with them.

$\text{Days' sales in inventory}=\frac{\text{Days in accounting period}}{\text{Inventory turnover}}$

To Compute: the inventory turnover ratio and days’ sales in inventory for Company A.