[xibadx]

Accounts receivable turnover decreased substantially from the prior year. Which of the following is a possible explanation for this finding?

Ans: Items shipped on consignment during the last month (of this year) were recorded as sales.

Need clarification as to the above. Since AR turnover = (sales/avg net receivables). A consignment sale improperly recorded as a sale would either cause the ratio to stay constant or increase (if allowance for doubtful account is considered). Any help will be appreciated. Thanks

All passed on first try - Licensed CPA Texas
Studying tip: Study throughout the day (short intervals, no more than 3hrs/day total), take exam later in the day and cram before your exam.

[MCLKT]

I try to reason through ratio questions in a very basic way. That usually works…

So we are looking for an explanation for the decrease in a ratio. This is caused by an increase in the denominator or a decrease in the numerator.

What are the other options on the MCQ? I'm just curious.

I would the think the increase in sales would cause and increase in AR Turnover.

But maybe the Increase in AR (denominator) could explain the decrease in turnover.

A:[73]97 F:[74]85 R:86 B:[74]82
*NINJA 10 Pt. COMBO & Yaeger*

[Onepasscpamaster]

By gapp you do not record consignment shipped as sales.

<Company book> <gapp>

A/R. /. Sales

Cgs / Inv

By recording consignment shipped as sales , company overstated A/R, sales and cgs Understated inv.

a/r turn over decreases because it is greater than 1 and

Both sales and a/ r increased by the same amount.

Hope this helps.

[xibadx]

“Both sales and a/ r increased by the same amount.”

Exactly… but then why would this cause a DECREASE to AR turnover.. it should either stay constant, or increase by a slight amount (if allowance for bad debts is considered)

is it just me or does Becker have poor quality control and several of their questions have incorrect responses

All passed on first try - Licensed CPA Texas
Studying tip: Study throughout the day (short intervals, no more than 3hrs/day total), take exam later in the day and cram before your exam.

[Anonymous]

“Exactly… but then why would this cause a DECREASE to AR turnover..”

Because if you have an A/R turnover as such:

150/100 = 1.5 AR TO

if both increase by due to consignment sales (say 50)…

200/150 = 1.33 AR TO

[FlipACoin]

Exactly Sheppard. It's tricky at first thought but remember with ratios a constant dollar increase in both numerator and denominator <> a proportionate increase in each.

[xibadx]

Sheppard – thanks a lot mate. that clears it up well.

I suppose I was confused with the “net a/r” and forgot that this ratio is usually greater than 1.

All passed on first try - Licensed CPA Texas
Studying tip: Study throughout the day (short intervals, no more than 3hrs/day total), take exam later in the day and cram before your exam.

[Author]

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