Confused on sim

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  • #191600
    Anonymous
    Inactive

    Matsworth is a manufacturer of fine rugs and wall hangings. Its products are sold by retailers in large department stores. In addition, the products are displayed and sold in consignment through independently owned and operated galley stores. During year 2 audit of Matsworth, the auditor used specific ratos to measure multiyear company performance. The values calculated for two ratios were considered to represent significant changes and are presented in the table below. TUrnover ratios are based on average balances.

    Double click in the shaded cells associated with each ratio, and select from the lists provided the two best explanations for the year 2 changes.

    Days sales in inventory

    Year 1: 70

    Year 2: 82

    explanation: the company has experienced rising costs of raw materials since December year 1


    Why is that a correct answer? Since days sales in inveotry is 365 x avg inventory / cogs, and since year 2 days sales ratio is higher than year 1, shouldn’t that be due to a DECREASE in cogs, not increase?

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  • #643183
    pfitz092
    Participant

    I did this exact same Becker Sim yesterday and had the same confusion. I spoke with my advanced audit professor and he agreed that the solution does not make sense. I agree that rising raw materials costs should theoretically increase COGS, thus increasing Inventory Turnover and decreasing Days Sales in Inventory (the opposite of the solution).

    The only way their explanation could make sense is that if raw materials prices have risen, inventory costs have similarly risen at a greater rate than COGS? I think that is a stretch, though. I am not going to worry about it. I am taking AUD next week- I think we both have a good understanding of the ratio. Still annoying though.

    #643184
    Anonymous
    Inactive

    Gotcha. I guess I'll just try to toss this out out of my head lol.

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