Which of the following is most likely to be indicative of a potential inventory fraud?
A) a sudden increase in the inventory turnover ratio
B) a sharp decrease in gross profit margin
C) a sudden decrease in number of days' sales in inventory
D) a sudden increase in number of days' sales in inventory

Question

Quizplus · Accepted Answer

When a company is overstating its inventory, inventory turnover will decrease. This reduction in inventory turnover will then decrease the denominator in number of days' sales in inventory, artificially forcing the ratio to increase. Thus, d is correct and c is incorrect. Likewise, answer a is incorrect because inventory fraud, which is typically the overstating of inventory, will decrease the inventory turnover ratio. answer b is wrong because overstating the inventory balance leaves COGS understated, thereby increasing the gross profit margin, not decreasing it.

Which of the Following Is Most Likely to Be Indicative