[Anonymous]

Wiley Question –

The table below presents ratios that the company uses to track its performance. During fieldwork, the auditors determined that the ratios were inaccurate due to significant errors, described below, made by the company in year 2. The company has agreed to make adjusting journal entries for year 2 to correct the errors.

After you have determined the appropriate adjusting journal entry (entries) to correct each error, double-click the shaded cell and select the impact, if any, that the adjusting journal entry (entries) would have on the erroneous ratio.

Ratio Year 2 Erroneous ratio Ratio Year 2 Erroneous ratio

Inventory turnover 4.38 Return on equity 17.53%

Impact of adjusting journal entries on the inventory turnover ratio Company errors:

Impact of adjusting journal entries on the return on equity ratio:

1. The company failed to record the materials in transit accrual for late supplier/vendor invoices.

I understand that inventory turnover is COGS/Average Inventory. Easy enough. But they’re saying that the failure to record will increase ROE because it increases ending COGS. I’m at a loss with that reasoning as it’s failure to record a purchase. I understand they’re saying Beg + purch – COGS = ending inventory. I’m just super confused how they can use COGS as the variable when they fail to record a purchase. I know I’m missing something.