This research assignment is an actual simulation directly taken from the audit section of a CPA exam. Please research the questions and provide the correct answer along with a short explanation as to why you chose that answer. Each question is worth ten points.

Gloria CPA, an auditor for Smart Move Inc., observed changes in certain Year 2 financial ratios or amounts from the Year 1 ratios or amount. For each observed change, answer the following questions regarding possible explanations. (Assume that the turnover ratios were calculated using year-end balances.)

Inventory turnover decreased substantially from the prior year. Which of the following is a possible explanation for this finding?

A. Items shipped FOB shipping point during December, Year 2, were included in Year 3 sales.

B. Items shipped on consignment during the last month of the year were recorded as sales.

C. A significant number of credit memos for returned merchandise that were issued during the last month of the year were not recorded.

D. Year-end purchases of inventory were understated by incorrectly excluding items received before year-end.

Accounts receivable turnover decreased substantially from the prior year. Which of the following is not a possible explanation for this finding?

A. Items shipped on consignment during the last month of the year were recorded as sales.

B. A significant number of credit memos for returned merchandise that were issued during the last month of the year were not recorded.

C. A larger percentage of sales occurred during the last month of the year, as compared to the prior year.

D. Sales increased at a lower percentage than cost of goods sold increased, as compared to the prior year.

Allowance for doubtful accounts increased from the prior year, but allowance for doubtful accounts as a percentage of accounts receivable decreased from the prior year. Which of the following is not a possible explanation for this finding?

A. Items shipped on consignment during the last month of the year were recorded as sales.

B. A significant number of credit memos for returned merchandise that were issued during the last month of the year were not recorded.

C. A larger percentage of sales occurred during the last month of the year, as compared to the prior year.

D. Sales increased at a lower percentage than cost of goods sold increased, as compared to the prior year.

Long-term debt increased from the prior year, but interest expense increased a larger-than-proportionate amount than long-term debt. Which of the following is a possible explanation for this finding?

A. A significant amount of long-term debt was paid off during the current year.

B. Long-term borrowing was refinanced on a short-term basis at lower interest rates.

C. Short-term borrowing was refinanced on a long-term basis at lower interest rates.

D. Short-term borrowing was refinanced on a long-term basis at higher interest rates.