[jeff]

Welcome to the Q1 2017 CPA Exam Study Group for AUD. 🙂

[sulaiman]

@forem004

Watch this video.. always helps me to get motivated to study! Especially after I failed FAR!

https://www.youtube.com/watch?v=yxurvsjFDMg

You are only one exam far to be CPA, and nothing you'll review is new to you so just keep up and remind yourself that you want to be done before the new exam launch. Good luck and I am sure I'll see you in (“Official “I Passed!!! I'm Done!!!” Thread”) version of Q1! You and I will post our celebration and experiences including how to get motivated to be a CPA! I truly can see that..

[Forem004]

Every time I get burnt out and complain to my Mom, she questions if I'm studying too much. Is that even possible for this exam?

[Holly]

I don't think I could study too much!!

Has anyone had an issue with the authoritative literature in the sims? I can't get anything to show on the right side.

BEC - 79
REG - 85
AUD - 5/27/16

[Future_CPA?]

Taking AUD Jan. 14. Trending score is almost 66%.. Super nervous about this thing. Hammered out about 2,000 MCQs and starting to watch NINJA Plus videos to help supplement my studying.

[Rhunter]

Greetings,

Looking for some clarification on this situation I encountered in a SIM on ratio analysis and the adjustment's impact on Inventory Turnover and Return on Equity.

Failure to record a materials in transit accrual for late supplier/vendor invoices, and the necessary adjustment's impact on the ratios in question.

The explanation has the necessary adjsutment as:

DR – Inventory
CR – COGS

And the effect on ratios as

Inventory Turnover Ratio – Decrease
ROE – Increase

I'm in complete agreement with the Inventory Turnover Ratio, pretty straightforward there. As per the explanation:
Cost of goods sold = Beginning inventory + Purchases − Ending inventory. Cost of Goods Sold (COGS) remains constant because Purchases will increase in the exact same amount as Ending Inventory when the correction for the materials in transit accrual is entered. As the Average Inventory (denominator) increases, the ratio will decrease.

It's the proposed adjustment and stated impact on ROE that has me confused. Here is the explanation:
Net income increases because COGS decreases and the stockholders' equity does not change, so the ratio increases.

Now correct me if I'm wrong, but wouldn't said adjustment be:

DR – Inventory
CR – A/P

Why would COGS be credited? It has nothing to do with a procurement function, COGS is purely sales related. Notice in bold in the explanation above that it states that COGS remains the same, so why does it suddenly decrease in relation to the ROE ratio analysis? Am I missing something, or is there a problem with this SIM?

Thanks in advance, and apologies for such a lengthy post. I'm hoping this may ultimately help some other folks out as well.

[Holly]

@Rhunter I'm assuming NINJA software? Which number?

BEC - 79
REG - 85
AUD - 5/27/16

[Holly]

Okay I found the simulation. It's #78 on NINJA.

The bold type is saying the entries to purchases and inventory will wash the each other in relation to COGS, not that the entries shouldn't be coded to that account.

The entry should be to COGS and it should reduce the balance, and that would increase net income. The A/P aspect of your question didn't occur to me because the question is only asking about the omission of inventory in this scenario and the adjustment to correct the balance.

BEC - 79
REG - 85
AUD - 5/27/16

[jeff]

Test Your Might (AUD) – MCQ Giveaway on Facebook

[Rhunter]

Hi, HRSexton. Thanks for your response.

I'm still not getting it. Could you post the sequence of entries?

I'm hung up on the fact that you're not hitting any liability account and thus not establishing any claim for the incoming inventory. By going straight to an expense account you're not recognizing the vendor's claim on the merchandise you haven't paid for yet.

[Forem004]

I'm with HRSexton on not considering AP because it only mentions the inventory costs. Also, you're in complete agreement on Inv TO, so why do you want to change the AJE for ROE?

[JessieP]

Starting my studies for AUD on 2/13 and I need a pass! This is my last exam and I only have two windows left. I REALLY don't want to have a retake in Q2 and not know if I lost FAR for 10 weeks while I wait for scores. Gotta nail this one, but motivation to study isn't coming easy…here's to a rough 6 weeks!

FAR:63,76!! 11/28/15
BEC:
AUD:
REG:75 🙂 6/6/16

[Rhunter]

Beginning Inventory + Purchases – Ending Inventory = COGS

This is not the adjusting entry, it's only a way to calculate COGS from inventory balances and purchases when COGS is not given. It's only the relationship between transactions and account balances. Accordingly, there is no account titled “Purchases.”

What happens when you make a purchase? Typically:

DR – Asset Account (in this case Inventory)
CR – Either a liability or Cash

This is the same entry that should be made in an accrual of Inventory in Transit. The only difference is that you're moving the recognition of the inventory to an earlier date so it can be recognized in the proper period.

Let's take it to the extreme.

Consider that you just started business, and you had a great first year and sold everything, and ending inventory on 12/31 is $0. Therefore:

COGS = Purchases (because both Beginning Inventory and Ending Inventory are $0)

As per the example, this is how you have been recording your purchases all year:

DR – Inventory
CR – COGS

Now each time you make a sale, these are your entries:

DR – COGS
CR – Inventory
DR – AR
CR – Sales

And ultimately when you collect cash:

DR – Cash
CR – AR

Notice anything missing from this cash conversion cycle? That's right, no AP cycle. No liabilities nor cash outflows related to inventory were recognized for the entire year.

Now the implications. COGS will be $0 because each time you made a purchase, you reduced COGS by the corresponding amount (I suppose in this case it should be called “Donated Value of Goods Sold”). Your first purchase will put COGS into a negative balance, and your last sale will zero it out. You'll basically be running a negative balance in COGS all year, something that is definitely not conceptually sound.

Gross Profit is 100%, sweet! (Gross Profit = Net Sales – COGS) The only drawback is that tax bill is going to be a hefty one, but that won't matter because all your inventory was FREE! Now that's a profitable business model!

Don't take me wrong, I'm not trying to ridicule or make fun, but rather go through a proofing and test the reasoning. This is how I test assumptions whenever I have doubt; take it to the extreme and see if it still holds water (I learned this from the Controller at my company, hehe).

I still don't see how COGS would ever be associated with an accrual. If someone can set me straight on this one, I would truly appreciate it!!!

BTW, this is an interesting read on this subject (under the Goods in Transit header):
https://accounting-financial-tax.com/2009/09/inventory-ownership-a-detail-overview/

and here:

What are goods in transit?

[Holly]

This is how I saw it based on the other two questions, this simulation is all about inventory and nothing else, really. Being that it said in transit was just the way of letting us know that the inventory was forgotten about because it wasn't on hand. Almost like the original entry would've been DR Inventory CR AP, then the count would've adjusted the inventory through COGS to tangible inventory, leaving out in transit goods but leaving the payable recorded. So…the adjustment would've been reversed once the mistake was discovered.

BEC - 79
REG - 85
AUD - 5/27/16

[Double-entry Deviant]

Hi all –

I'm doing my final review – take my 4th (and hopefully last) try at Audit.

I'm going over my simulations that I've gotten wrong or scored poorly in. I can't seem to find an easy way to review some of these questions easily without jumping through major hoops to find when I originally answered the question.

So – if I scored 16% the 1st time on a question, I have to go through all questions in the session results and then do a “find”, hoping I find “16”. Well, this time around, I'm combing through 16 many many times (given the year – 2016) before I can even find the question. I could never find it….grrr!!!

I really want to review my weakest simulations, but Ninja doesn't seem to have an easy way to do this.

Thoughts?

REG: 5/30/15 - 77
FAR: TBD
BEC: 8/31/15 - 70, 73, 1/8/16 - 77
AUD: 6/1/16- 73, 8/2/16

[Rhunter]

Have you tried looking at your progress report on the dashboard?

[Author]

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