Auditing and Attestation- Certified Public Accountant (CPA) Practice Exam -

A decrease in accounts receivable turnover could indicate what issue?

1. Obsolete inventory has been written down

2. Improper aging of accounts receivable

3. A significant write-off of receivables occurred

4. An improper cutoff of sales at year-end

The correct answer is: An improper cutoff of sales at year-end

A decrease in accounts receivable turnover could indicate an improper cutoff of sales at year-end. This ratio measures how effectively a company collects its accounts receivable, reflecting the efficiency of credit sales and collections practices. When the turnover ratio decreases, it suggests that accounts receivable are not being collected as quickly as before, which may point to issues during the period-end closing process. An improper cutoff of sales means that sales might have been recorded in the wrong accounting period, either too early or too late. If sales are recognized before payment is collected and these receivables remain outstanding longer than anticipated, it results in a lower turnover ratio. This misalignment can impair cash flow as well, compounding the issue. On the other hand, while improper aging of accounts receivable or significant write-offs of receivables can also affect the analysis of accounts receivable turnover, they generally have different implications. Improper aging may complicate the financial statement presentation but does not directly reflect turnover in the same way as sales cutoffs affecting timing and realizability of revenue do.