I had this question come up in my MCQ session. What I don't like about this is the fact that the answer completely contradicts what is stated in the Roger book/lecture.
For the fiscal year ending December 31, previous year and the current year, Justin Co. has net sales of $1,000,000 and $2,000,000; average gross receivables of $100,000 and $300,000; and allowance for uncollectible accounts receivable of $30,000 and $50,000, respectively. If the accounts receivable turnover and the ratio of allowance for uncollectible accounts receivable to gross accounts receivable are calculated, which of the following best represents the conclusions to be drawn?
A. Accounts receivable turnovers are 14.3 and 8.0 and the ratios of uncollectible accounts receivable to gross accounts receivable are 0.42 and 0.20, respectively. Examine allowance for possible understatement of the allowance.
B. Accounts receivable turnovers are 14.3 and 8.0 and the ratios of uncollectible accounts receivable to gross accounts receivable is 0.42 and 0.20, respectively. Examine allowance for possible overstatement of the allowance.
C. Accounts receivable turnovers are 10.0 and 6.6 and the ratios of uncollectible accounts receivable to gross accounts receivable are 0.30 and 0.16, respectively. Examine allowance for possible overstatement of the allowance.
D. Accounts receivable turnovers are 10.0 and 6.6 and the ratios of uncollectible accounts receivable to gross accounts receivable are 0.30 and 0.16, respectively. Examine allowance for possible understatement of the allowance.
The answer is D, assuming that the actual accounts receivable turnover ratio is net sales (credit) / average receivables. My qualm in this is that, from what I understand, the A/R turnover ratio has average NET receivables in the denominator.
Why in the world would the book/lecture suggest one way to approach the problem and then the MCQs suggest another? That's really annoying and I hope I won't have to deal with that come exam day.
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