The accounts receivable turnover ratio increased during 20X2. This is consistent with:
a. Items shipped on consignment during December were recorded as credit sales; no cash receipts have yet been received on these consignments.
b. The company increased credit sales by 10% by allowing more lenient credit terms—30 days are now allowed whereas previously only 20 days were allowed.
c. A major credit sale on which title passed as of December 31, 20X2 was recorded in January of 20X3.
d. Sales for each month are approximately 25% higher than those of the preceding year.
Answer:C
The requirement is to identify the reply which is consistent with an increase in the accounts receivable turnover ratio (credit sales / accounts receivable). Answer (c) is correct because not including the sale in either the 20X2 sales or year-end accounts receivable increases the ratio. For example, assume that the actual total year sales are $100,000 and yearend receivables are $20,000—a turnover of 5—when the sale, assume for $5,000, is included in 20X2. Subtracting the $5,000 from 20X2 sales and receivables results in a turnover ratio of 6.33 ($95,000 / $15,000)—an increase. Answer (a) is incorrect because the consignment increases the numerator and denominator by an equal amount—this decreases the ratio. Answer (b) is incorrect because the denominator of the ratio is likely to increase disproportionately when 30 days rather than 20 days are allowed—this results in a decrease in the ratio. Answer (d) is incorrect because one would expect a pro-rata increase in accounts receivable, thus resulting in no change to the ratio.