During the audit of a dealership selling only new luxury automobiles, the auditors calculated the year 2 and year 1 ratlos in the table below. mation Year 2 Year 1 Explanation Days sales in accounts receivable 32 20 Question 1 Inventory turnover 4.01 6.32 Question 2 Debt to equity 3.2 4.) Question 3 Return on aasta 10.5 12.24 Question 4 Net fixed assete to equity 19.10 23.26 Question 5 Select the most reasonable explanation the controller will provide relating to year 2 for each change. An explanation may be used once, more than once, or not at all. Consider each ratio Independently. Explanation: Event Occurring in Year 2 a. Due to a more severe than expected economic downturn, buyers have shifted to economy cars, resulting in higher than expected ending year 2 inventory b. Early in the year, the company hired additional collection clerks. At year-end, the company removed some fully depreciated machinery from its books d. The board of directors Implemented and began a buyback of company stock e. The company promoted its assistant treasurer to replace its recently retired treasurer. The company Increased the annual dividend to shareholders. 9. The company Instituted more stringent collection policies h. The company made a required principal payment on its long-term debt. L. The company reclassified Its International production facilities to held-for-sale. Positive consumer reviews have caused increased sales of cars and a lower year 2 ending Inventory as the manufacturing process has been strained by capacity constraints. k Sales managers recorded fraudulent sales at year-end to receive larger commissions, ratios Year 2 Year 1 Explanations 1. Days sales in accounts receivable 32 20 2 hvory Lanover 4.01 6.32 enging yedi inventory b. Early in the year, the company hired additional collection clerks. c At year-end, the company removed some fully depreciated machinery from its books. d. The board of directors Implemented and began a buyback of company stock. e. The company promoted its assistant treasurer to replace its recently retired treasurer. f. The company Increased the annual dividend to shareholders. 9. The company Instituted more stringent collection policies. h. The company made a required principal payment on its long-term debt. L. The company reclassified Its International production facilities to held-for-sale. ]. Positive consumer reviews have caused increased sales of cars and a lower year 2 ending inventory as the manufacturing process has been strained by capacity constraints. k. Sales managers recorded fraudulent sales at year-end to receive larger commissions. Ratios Year 2 Year 1 Explanations 32 20 1. Days sales in accounts receivable 2. Inventory tumover 4.01 6.32 3. Debt to equity 3.2 4.3 4. Return on assets 10.5% 12.2% 5. Netfaced assets to equity 19.1% 23.2%
