[lacpa2012]

Wiley Question –

Which of the following is most likely to increase days’ sales in accounts receivable=365/(Sales/AR) at the end of the year?

1) a smaller percentage of sales occurred during the last month of the year, as compared to the prior year

2) a larger percentage of sales occurred during the last month of the year, as compared to the prior year <–Correct Answer

3) Sales increased as compared to the prior year

Why is choice 3 wrong?

[Anonymous]

Because a sales increase over the prior year would probably show a commensurate increase in sales on credit, thus the ratio is likely to stay the same or close to the same.

[Anonymous]

Choice two is correct because if sales increased in only the last month, then A/R would be inflated because it doesn't have the “normal” time to be collected, and thus drop. The inflation of A/R would reduce the ratio of “Sales/AR”. 365 divided by a smaller number would increase your days sales in receivables.

[KassiusKlay]

“Sales over the whole year would also increase AR over the whole year and probably at the same pace. But if Sales increased in the LAST month of the year, the related AR would not show up on the books until the following year.” thats what I had in my notes, but Ill be honest with you I HATED ratio/audit questions, so this might be completely incorrect and I apologize in advance if someone corrects me :/

Form is temporary, class is permanent.

Audit 4/19/12 - 77
BEC 5/31/12 - 75
FAR 8/30/12

[Anonymous]

Kassius, just so no one gets confused, the A/R posted after year end would effectively decrease A/R and make the Sales/AR ratio higher and decrease days sales in receivables. 365/(higher number) = lower days sales in receivables.

In order for days sales to increase, we have to find a way to add more days to the year (not possible), decrease sales more than a decrease in A/R or increase A/R more than an increase in sales.

In this instance, sales are increasing and A/R is increasing, but year end cut-off prevents us from collecting A/R in our normal time span (say we sold a lot of credit sales in the last week of December–A/R is higher because people haven't paid down their accounts yet). So 365/(lower number) = increase in days sales in receivables.

[KassiusKlay]

“but year end cut-off prevents us from collecting A/R in our normal time span (say we sold a lot of credit sales in the last week of December–A/R is higher because people haven't paid down their accounts yet)” This is what I meant to say! sorry for the confusion guys! Honestly was not a fan of this EXACT question when I was preparing for AUD. Thanks for clearing it up!

Form is temporary, class is permanent.

Audit 4/19/12 - 77
BEC 5/31/12 - 75
FAR 8/30/12

[lacpa2012]

Thanks both! I think I got it 🙂

[Author]

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