Selected data from Carson Corporation's financial statements for the year ended December 31, Year 2 are as follows. $\begin{array}{ll}
\text { Current ratio } & 1.4 \
\text { Quick ratio } & 0.86 \
\text { Current liabilities } & \$ 450,000 \
\text { Accounts receivable tumover } & 6.0 \
\text { Merchandise inventory turnover } & 4.0 \
\text { Rate of return on assets } & 6.5 \%
\end{array}$

$\text { Selected Account Balances at December 31, Year I: }$

$\begin{array}{ll}
\text { Accounts receivable } & \$ 355,000 \
\text { Merchandise inventory } & 190,000
\end{array}$

$\text { Year } 2 \text { Operations }$

$\begin{array}{ll}
\text { Sales } & \$ 1,241,000 \
\text { Cost of goods sold } & 800,000
\end{array}$Assuming that prepaid expenses are immaterial, ending merchandise inventory at December 31, Year 2 is
A)$180,000
B)$210,000
C)$220,000
D)$240,000
E)$260,000

Question

Selected data from Carson Corporation's financial statements for the year ended December 31, Year 2 are as follows. $\begin{array}{ll}
\text { Current ratio } & 1.4 \
\text { Quick ratio } & 0.86 \
\text { Current liabilities } & \$ 450,000 \
\text { Accounts receivable tumover } & 6.0 \
\text { Merchandise inventory turnover } & 4.0 \
\text { Rate of return on assets } & 6.5 \%
\end{array}$

$\text { Selected Account Balances at December 31, Year I: }$

$\begin{array}{ll}
\text { Accounts receivable } & \$ 355,000 \
\text { Merchandise inventory } & 190,000
\end{array}$

$\text { Year } 2 \text { Operations }$

$\begin{array}{ll}
\text { Sales } & \$ 1,241,000 \
\text { Cost of goods sold } & 800,000
\end{array}$Assuming that prepaid expenses are immaterial, ending merchandise inventory at December 31, Year 2 is
A)$180,000
B)$210,000
C)$220,000
D)$240,000
E)$260,000

Quizplus · Accepted Answer

To find the ending merchandise inventory, we can use the merchandise inventory turnover ratio, which is given as 4.0. This ratio is calculated by dividing the cost of goods sold by the average inventory. Since we are not given the beginning inventory for Year 2, we assume the ending inventory of Year 1 to be the beginning inventory for Year 2, which is $190,000. The formula for inventory turnover is: $$ \text{Inventory Turnover} = \frac{\text{Cost of Goods Sold}}{\text{Average Inventory}} $$Given that the cost of goods sold is $800,000 and the inventory turnover ratio is 4.0, we can rearrange the formula to solve for the average inventory: $$ \text{Average Inventory} = \frac{\text{Cost of Goods Sold}}{\text{Inventory Turnover}} = \frac{800,000}{4} = 200,000 $$The average inventory is the average of the beginning and ending inventory, so: $$ \text{Average Inventory} = \frac{\text{Beginning Inventory} + \text{Ending Inventory}}{2} $$Substituting the known values: $$ 200,000 = \frac{190,000 + \text{Ending Inventory}}{2} $$Solving for the ending inventory: $$ 400,000 = 190,000 + \text{Ending Inventory} $$ $$ \text{Ending Inventory} = 210,000 $$Therefore, the ending merchandise inventory at December 31, Year 2 is $210,000.

Selected Data from Carson Corporation's Financial Statements for the Year