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5. Items 1 through 6 represent an auditor's obser...

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5. Items 1 through 6 represent an auditor's observed changes in certain financial statement ratios or amounts from the prior year's ratios or amounts. For each observed change, select the most likely explanation or explanations from the list of explanations provided. Answers on the list may be selected once, more than once, or not at all. (Please use the following key (e.g., ?A?) for your answers: A-F). Do not copy the rule itself into your student answer packet. Auditor's observed changes (independent of each other). A. Inventory turnover increased substantially from the prior year. (Select 3 explanations) B. Accounts receivable turnover decreased substantially from the prior year. (Select 3 explanations) C. Allowance for doubtful accounts increased from the prior year, but allowance for doubtful accounts as a percentage of accounts receivable decreased from the prior year. (Select 3 explanations) D. Long term debt increased from the prior year, but interest expense increased a larger than proportionate amount than long term debt. (Select 1 explanation) E. Operating income increased from the prior year although the entity was less profitable than in the prior year. (Select 2 explanations) F. Gross margin percentage was unchanged from the prior year although gross margin increased from the prior year. (Select 1 explanation) Explanations (Please use these numbers for the explanations for A-F above when responding to this problem): (1) Items shipped on consignment during the last month of the year were recorded as sales. (2) A significant number of credit memos for returned merchandise that were issued during the last month of the year were not recorded. (3) Yearend purchases of inventory were overstated by incorrectly including items received in the first month of the subsequent year. (4) Yearend purchases of inventory were understated by incorrectly excluding items received before the year-end. (5) A larger percentage of sales occurred during the last month of the year, as compared to the prior year. (6) A smaller percentage of sales occurred during the last month of the year, as compared to the prior year. (7) The same percentage of sales occurred during the last month of the year, as compared to the prior year. (8) Sales increased at the same percentage as cost of goods sold, as compared to the prior year. (9) Sales increased at a greater percentage than cost of goods sold increased, as compared to the prior year. (10) Sales increased at a lower percentage than cost of goods sold increased, as compared to the prior year. (11) Interest expense decreased, as compared to the prior year. (12) The effective income tax rate increased, as compared to the prior year. (13) The effective income tax rate decreased, as compared to the prior year. (14) Short term borrowing was refinanced on a long-term basis at the same interest rate. (15) Short term borrowing was refinanced on a long-term basis at lower interest rates. (16) Short term borrowing was refinanced on a long-term basis at higher interest rates.,Thank you very much. Greatly appreciated,that was very helpful. Thank you. you confirmed my second guesses.

 

Paper#7838 | Written in 18-Jul-2015

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