[Anonymous]

The question to choose the best explanation from the auditors observed changes.

Observed change: Inventory turnover increased substantially from PY.

Answer: A significant # of credit memos for returned merchandise that were issued during the last month of the year were not recorded.

First what is a credit memo (vs a debit memo)?

Now if returned merchandise were not properly recorded, wouldnt that make inventory overstated, therefore make Inventory T/O decrease? im confused.

(This question is from my Roger Cram TBS #6)

[SusanStudies]

A credit (memo) is issued when a customer buys something from you on account and then returns the items. A credit memo reduces their AR balance and Sales. The items are returned to stock, thus increasing inventory and reducing COGS. Think of it from the seller's point of view.

If inventory turnover increased, it would result in less inventory at the end of the period. What could have caused the turnover to go up? Unrecorded credit memos. Had credit memos been properly recorded the inventory at the end of the year would have been higher. Therefore, the inventory turnover would not be so high.

Hope this helps a little.

AUD: 07/11/11 - Passed
BEC: 08/27/11 - Passed
FAR: 01/17/12 - Passed
REG: 04/30/12; Re-take 7/16/12 - Passed

FINISHED!!!!!!!!

[Anonymous]

The formula for Inventory turnover is: COGS/Average Inventory.

Here's the journal entry for sale…

Accts Receivable Dr

Sale Cr

COGS Dr

Inventory Cr

A credit memo is issued, so the journal entry that was SUPPOSED to be made is…..

Sales Returns Dr

Accts Receivable Cr

Inventory Dr (increase account)

COGS Cr (decrease account)

If that last entry was not recorded, they never increased Inventory and never decreased COGS. So Inventory is understated and COGS is overstated. Again, the formula for Inventory turnover is COGS/Average Inventory. So, if the numerator is overstated and the denominator is understated, that will definitely cause a substantial increase in Inventory turnover. So, Roger's answer is correct and I hope I am too, lol.

Best of luck to you!!

[Account Ant]

SusanStudies, CPAMan

Thank you. Very clear!

FAR 70,89
REG November 2014
BEC Didn't even look at it.
AUD 83

[Anonymous]

thanks both for u explainations. makes sense ^_^

[Author]

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