ExpertHard1 markMultiple Choice
CPA · Question 66 · Area III: Procedures
An auditor is performing a ratio analysis. The 'Inventory Turnover' ratio has decreased significantly from the prior year. This most likely indicates:
An auditor is performing a ratio analysis. The 'Inventory Turnover' ratio has decreased significantly from the prior year. This most likely indicates:
Answer options:
A.
Inventory is being sold faster than before.
B.
The existence of obsolete or slow-moving inventory.
C.
The company has switched to Just-In-Time inventory.
D.
Sales have increased proportionally with inventory.
How to approach this question
Formula: COGS / Average Inventory. If Ratio goes down, either COGS went down (less sales) or Inventory went up (stockpiling).
Full Answer
B.The existence of obsolete or slow-moving inventory.✓ Correct
The existence of obsolete or slow-moving inventory.
A decrease in inventory turnover means inventory is sitting on the shelves longer. This is a primary indicator of potential obsolescence or slow-moving goods, raising valuation risks.
Common mistakes
Confusing the direction of the ratio (High turnover is usually good/fast).
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