Question

Analytical Procedures: Ratio Relationships. The following situations represent errors and frauds that could occur in financial statements Required State how the ratio in question would compare (higher, equal, or lower) to what the ratio should have been had the error or fraud not occurred. a. The company recorded fictitious sales with credits to sales revenue accounts and debits to accounts receivable. Inventory was reduced, and cost of goods sold was increased for the profitable "sales." Is the current ratio higher than, equal to, or lower than what it should have been? b. The company recorded cash disbursements by paying trade accounts payable but held the checks past the year-end date, meaning that the "disbursements" should not have been shown as credits to cash and debits to accounts payable. Is the current ratio higher than, equal to, or lower than what it should have been? Consider cases in which the current ratio before the improper "disbursement" recording was (1) higher than 1:1, (2) equal to 1:1, and (3) lower than c. The company uses a periodic inventory system for determining the balance-sheet amount of inventory at year-end. Very near the year-end, merchandise was received, placed in the stockroom, and counted, but the purchase transaction was neither recorded nor paid until the next month. What was the effect of this on inventory, cost of goods sold, gross profit, and net income? How were these ratios affected compared to what they would have been without the error: current ratio (remember three possible cases from part b.), gross margin ratio, cost of goods sold ratio, inventory turnover, and receivables turnover?

Answer 1

a) current ratio =current assets(accounts receivable +inventories+etc.) /current liability. if current assets  decrease , current ratio will increase and vice versa .

here, current assets increase and current liability decreases (if cost of goods sold increase , profit decreases ), So current ratio will be higher .

b) current ratio is lower than what it should be. Because cash would shown more after check is been credited .

c) there will be no effect . as purchase transaction is not included in year end financial statements .

d)if old receivables written off properly ,

current ratio would be higher .day 's sales receivable would be higher . doubtful account ratio would be lower and receivable turnover ratio would be higher .

Answer 2

What is the answer of the e part