The Audit Significance of the Financial Ratio, Fixed Asset Turnover

question 36

Multiple Choice

The audit significance of the financial ratio, fixed asset turnover, is:

• A) this financial ratio provides a reasonableness test of the entity's proportion of equity that may be compared with prior years' experience or industry data.
• B) an unexpected increase or decrease in the depreciation expense as a percent of depreciable assets may indicate an error in calculating depreciation.
• C) an unexpected increase in this financial ratio may indicate the failure to record or capitalize depreciable assets.
• D) this financial ratio provides a test of the entity's ability to generate earnings to cover the cost of service debt.
• E) this financial ratio provides a reasonableness test of shareholders' equity given the company's earnings and financing structure.

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Definitions:

Direct Labor Hour

Direct labor hour refers to the time spent by workers directly involved in the production of goods or services.

Overhead Applied

A portion of overhead costs assigned to a particular cost object based on a predetermined rate.

Direct Labor Efficiency Variance

The difference between the budgeted amount of direct labor required to produce an output and the actual direct labor used.

Favorable

A term used in budgeting and finance to indicate results that are better than expected, such as lower costs or higher revenues.