[unsure97]

If a question ask what’s the ratio effect of the inventory turnover:

On financial statement: COGS/Inventory, e.g. 20/100 = 0.20

When in fact, COGS was understated by $30, which means inventory turnover S/B (20+30)/100 = 0.50

what is the ratio effect in this situation???

Am I looking it as the “before” or “after”?

A. ratio effect – decrease

B. ratio effect – increase

Please helpppp!!!! THANKSSS

[myxh]

hi,

I also have a questions about the ratio analysis.

Inventory turnover decreased substantially from the prior year. WHich of the following is a possible explanation for this finding?

A. Items shipped FOB shipping point during December Year 2 were include in Year 3 sales.

B. Items shipped on consignment during the last month of the year were recorded as sales.

C. A significant number of credit memos for returned merchandise that were issued during the last month of the year were not recorded.

D. Year-end purchased of inventory were understated by incorrectly excluding items received before the year-end.

The answer is A. but I don't understand all the other ones, could someone please help?

[Anonymous]

In my opinion, the best way to approach ratio questions is to make up numbers and plug them into the ratios to see what the effect is.

[wldcatnc]

@myxh B, C, and D all cause the Inventory ratio to increase or stay the same instead of decrease.

B. Since the items were recorded as sales then you have to also credit merchandise inventory and debit COGS. Since COGS is going up inventory will turnover faster and your numerator increases.

C. The returned merchandise was not recorded so the COGS and Inventory stayed the same when it should of went down. So this one shows that the ratio did not decrease.

D. Inventory was understated which means that ratio should of gone down but stayed the same. So there is no decrease.

FAR: 81
REG: 85
AUD: 73,71,83
BEC: 82

DONE!!!!!!

[Anonymous]

@myxk, Inventory ratio= COGS/Avg. inventory

In order for this ratio to decrease, the denominator must increase OR the numerator must decrease. The only answer that increases the denominator(Inventory) is choice A. In choice A, the inventory is overstated, because items shipped FOB shipping point should have been recorded in year 2, (increasing sales and) decreasing inventory…but instead it was recorded in year 3 causing the inventory to be overstated in year 2.

[Author]

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