Priscilla, the rate of change is what matters most.
ill give an example to illustrate. lets say management added fraudulent sales to their year end totals. well that means a debit to AR of lets say 600 and a credit to Sales of 600. now fraudulent sales means that no one is actually selling anything to anyone so there are no collections. That means Sales is increased by 600 as did AR. It is worth noting here that usually, and this is according to the exam questions I've seen, its commonplace to see Sales balances to be larger than A/R balances. So for this example lets say last years Sales was 1000 and A/r was 500. If both increase by the same fraudulent amount, the greater rate of change goes to A/R. The rules of ratios indicates that if the denominator increases at a rate greater than the numerator, then the ratio has to decrease.
Math Proof:
Yr 1 ART = 1000/500 (assuming ending balances are used instead of avg acct rec) = 2
Yr 2 ART = 1600/1100 = 1.45
Ill walk you through it the opposite way starting from Acct Rec Turnover in Days. If the ratio is increasing dramatically from one year to the next, that means your denominator has to be decreasing [ Days AR = 365 / ART]. Why would ART (acct rec turnover) be decreasing? Well ART = NCS / AR (assume ending balance again). Either Sales is plummeting really really fast compared to the change in AR or A/R is increasing significantly more compared to rate of change in Sales.
I could see an argument that if Sales decreases significantly and people dont pay off their A/R balances, a/r starts accumulating then ART would fall. But, the more likely case in the eyes of the AICPA is that ART would decrease because of fraud (lesson in professional skepticism and the idea that people overstate assets).
Hence, Sales of 1000 in Y1 increases by 600 due entirely to fraud and the Y1 AR balance of 500 increases fraudulently by 600 as well since there arent any collections. AR is increasing at a rate of 120% while sales is increasing only at a rate of 60%.
Basically you need to understand ratios and rates of change to get these analytically ratio questions correctly. tricky i know..
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