Items 10 through 15 represent an auditor’s observed changes

Items 10 through 15 represent an auditor’s observed changes in certain financial statement ratios or amounts from the prior year’s ratios or amounts. For each observed change, select the most likely explanation or explanations from List B. Select only the number of explanations as indicated. The observed changes are not related to the calculations in requirement (a) above and are independent of each other. Answers on the list may be selected once, more than once, or not at all.
10. Inventory turnover increased substantially from the prior year. (Select 3 explanations.)
11. Accounts receivable turnover decreased substantially from the prior year. (Select 3 explanations.)
12. 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. (Select 3
explanations.)
13. Long-term debt increased from the prior year, but interest expense increased a larger-than-
proportionate amount than long-term debt. (Select 1 explanation.)
14. Operating income increased from the prior year, although the entity was less profitable than in the
prior year. (Select 2 explanations.)
15. Gross margin percentage was unchanged from the prior year, although gross margin increased
from the prior year. (Select I explanation.)

List B–Explanations:
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 was issued during the last
the month of the year was not recorded.
C. Year-end purchases of inventory were overstated by incorrectly including items received in the first
month of the subsequent year.
D. Year-end purchases of inventory were understated by incorrectly excluding items received before
the year-end.
E. A larger percentage of sales occurred during the last month of the year, as compared to the prior
year.
F. A smaller percentage of sales occurred during the last month of the year, as compared to the prior
year.
G. The same percentage of sales occurred during the last month of the year, as compared to the prior
year.
H. Sales increased at the same percentage as cost of goods sold, as compared to the prior year.
I. Sales increased at a greater percentage than the cost of goods sold increased, as compared to the prior
year.
J. Sales increased at a lower percentage than the cost of goods sold increased, as compared to the prior
year.
K. Interest expense decreased, as compared to the prior year.
L. The effective income tax rate increased, as compared to the prior year.
M. The effective income tax rate decreased, as compared to the prior year.
N. Short-term borrowing was refinanced on a long-term basis at the same interest rate.
O. Short-term borrowing was refinanced on a long-term basis at lower interest rates.
P. Short-term borrowing was refinanced on a long-term basis at higher interest rates.