[goforCPA]

In turnover ratios, are the net sales only the net credit sales, or should they include cash sales as well.

October 2011-May 2013. Did not loose any credit!!
AUD - 73, 79
REG - 86
FAR - 72, 83
BEC - 80, last one, DONE!!

[Anonymous]

I don't have a yes or no answer to your question, but just logically thinking through it I would say it should not include cash sales. The receivable turnover is supposed to measure how quickly you collect receivables, so if you added the amount of cash sales in there I would think that would skew your answer in a positive direction. And we know that would violate conservatism 😉

[misanthrope87]

Ya, just net credit sales.

B 2/12 87
A 11/11 90
R 8/11 86
F 5/12 88

[smuppane]

I think you should consider cash sales as well. As you calculate operating cycle one part of it is receivables turnover. So if you have lot of cash sales then your operating cycle would be small. So receivables turnover should include both cash sales and non-cash sales.

REG - 07/01/2011 - 93
AUD - 08/25/2011 - 95
FAR - 10/29/2011 - 94
BEC - 11/28/2011 - 90

[goforCPA]

Thank you, in that case why would (c) be considered a wrong answer in the below question?

A CPA firm is auditing a client that sells merchandise on credit to a wide variety customers. Last year the accounts receivable turnover ratio was 5.9 but this year it has fallen to 4.1. The auditor is concerned by the significance of that change and hopes to find a logical explanation. Which of the following is most likely to explain the cause of that change?

A) The company has dropped its sales prices but shortened the length of time a customer is given to pay before a late charge is assessed.

B) The company accountant has fraudulently tried to boost reported net income by denoting inventory and crediting sales when no transaction took place.

C) The company is making a higher percentage of it's sales for cash

C) The company started making sales on consignment this year and recording those transactions as credit sales at the time of shipment to consigned although no cash has yet been collected.

The answer is (d) because both sales and a/r are incorrectly inflated since a consignment sale does not occur at the time of shipment but only when the goods are actually sold by the consignee.

This is understood, but I think (c) can also be an answer since both the credit sales and a/r would be impacted negatively.

October 2011-May 2013. Did not loose any credit!!
AUD - 73, 79
REG - 86
FAR - 72, 83
BEC - 80, last one, DONE!!

[Anonymous]

If the company is making a higher percentage of its sales in cash and cash sales are included in the receivables turnover ratio, then I believe the number would increase, not decrease. For example…

Net Credit Sales not including cash = 200

Average Receivables = 100

then the ratio would be 200/100 = 2

Net Credit Sales 200 + cash sales 100 = 300

Average Receivables = 100 (receivables should not change b/c cash sales are a debit to cash and not AR)

then the ratio would be 300/100 = 3

So the ratio would increase as a result of (c) and not decrease like the problem states.

[goforCPA]

But you are not sop pose to include cash sales in the sales number for turnover ratio, in which case a higher amount of cash sales this year compared to last year would impact your credit sales and a/r negatively i.e. A decrease.

October 2011-May 2013. Did not loose any credit!!
AUD - 73, 79
REG - 86
FAR - 72, 83
BEC - 80, last one, DONE!!

[smuppane]

You know what I will take back what I posted earlier. Apologies for my earlier post.

**edited

REG - 07/01/2011 - 93
AUD - 08/25/2011 - 95
FAR - 10/29/2011 - 94
BEC - 11/28/2011 - 90

[Author]

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