Question

If accounts receivable turnover (credit sales/receivables) was 7.1 times last year compared to only 5.6 times in the current year, it is possible that there were: A. fictitious sales in the current year. B. unrecorded credit sales in the current year. C. more thorough credit investigations made by the company late last year. D. unrecorded cash receipts last year.

Answer 1

Answer:

A. Fictitious Sales in the Current Year

Explanation:

The Accounts receivable turnover is used to access a company's ability to make it debtor pay what they owe or ability to collect on the debts owed the company by customers.

Since the formula is Credit sales/ Receivables, a reduction in the accounts receivable turnover will mean an increase in receivables. The implication of this is that the Company is claiming that it is making more sales but since no cash or revenue is coming in, it is increasing the receivables instead. Large receivables will drive down the receivables turnover in the current period compared to the last.

If there are no fictitious sales, then sales should go up without a very sizeable increase in receivables at the end of the period.