Acc491 Wk4

Chapter 8-15 (Analytical procedures)

Analytical procedures show that inventory turnover decreased from 31–34 days to 27 days, and gross margins declined to the lowest level in five years. What might this indicate about the risk of misstatement with respect to inventory and inventory purchases?

Answer:

Inventory turnover ratio = COGS / average inventory

Turnover days = 365/Inventory turnover ratio

COGS of $1,000 / Inventory of 100 = Turnover ratio of 10 or 365/10 = 36.5 days

COGS of $2,000 / Inventory of 100 = Turnover ratio of 20 or 365/20 = 18.25 days

COGS of $1,000 / Inventory of 50 = Turnover ratio of 20 or 365/20 = 18.25 days

Thus, COGS may be overstated along with understating of inventory.

Gross margin is something which is being determined after subtracting COGS from sales and dividing by sales. In this case, due to various reasons COGS over the period of time is higher which has resulted in reducing the gross profit earned by the company and thus gross profit margin has decreased.

In the case, the main risk is the fall in sales over the period of time and thus, COGS is higher for the entire period when compared to the lesser sales or inventory for the given period of time.

In case of purchases, there are possibilities where the purchases are being accounted twice which results in lower inventory days and also in higher COGS with lesser margins.

There are chances were the inventory might be stolen which has resulted in lesser inventory accompanied with higher COGS.

Chapter 8-16 (Analytical procedures)

Part A – Calculate purchases, gross margin, inventory turn days, accounts receivable turn days, and accounts payable turn days for the years ended 20x2, 20x3, 20x4, 20x5.

| 20 X 1 | 20 X 2 | 20 X 3 | 20 X 4 | 20 X 5 |

Accounts Receivable, net | $837 | $1,335 | $1,121 | $962 | $822 |

Inventory | $1,025 | $1,327 | $1,099 | $1,003 | $1,027 |

Accounts Payable | $164 | $380 | $225 | $201 | $175 |

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