Homework7FinancialStatementFraudProblems.xlsx

Start Here

Use the financial statements and schedules on the following tabs to answer the questions on this tab.

1. Prepare a horizontal and veritical analysis of the Balance Sheet and the Income Statement.

2. Based on the results of your vertical and horizontal analyses, which accounts appear out of alignment? Provide a brief analysis of the relationships between the accounts.

3. Using the Schedule of Equipment and Leasehold Improvements and the Depreciation Schedule, analyze the reasonableness of the depreciation expense for each fixed-asset category on a yearly basis and explain your findings. Assume fixed assets have a 5-year life and a mid-year purchase date.

4. Based on your conclusions in question 3 regarding equipment, which fraud scheme(s) might cuase this activity and what additional procedures might you perform?

5. Based on your conclusions in question 3 regarding leasehold improvements, which fraud scheme(s) might cause this activity and what additional procedures might you perform?

6. Does the relationship between Accounts Receivable and the Allowance for Doubtful Accounts appear reasonable? Why or why not?

Balance Sheet

Statements of Financial Position

As of June 30, 20X3, 20X2, and 20X1

(In Thousands)

June 30, June 30, June 30,

20X3 20X2 20X1

Current assets:

Cash and cash equivalents $ 2,388 $ 1,695 $ 453

Accounts receivable, net of allowance for

doubtful accounts of $56; $171; and $105

June 30, 20X3; 20X2; and 20X1, respectively 5,592 3,432 2,094

Inventories 9,434 5,034 3,266

Current portion of notes receivable 2,681 1,592 622

Deferred income taxes 211 209 299

Other current assets 1,157 971 552

Total current assets 21,463 12,933 7,286

Equipment and leasehold improvements, net 6,940 910 600

Other assets 183 167 163

Deferred income tax 222 126 34

Intangible assets 274 251 252

Total assets $ 29,082 $ 14,387 $ 8,335

Current Liabilities:

Notes payable $ 1,625 $ 1,328 $ 1,021

Current portion of long-term obligations under capital leases 136 103 95

Accounts payable and accrued expenses 5,862 3,871 2,307

Income taxes payable 614 591 86

Total current liabilities 8,237 5,893 3,509

Long-term obligations under capital leases 367 161 79

Deferred income taxes 242 – 0 – 0

Total liabilities 8,846 6,054 3,588

Stockholders’ equity:

Common stock 183 56 37

Additional paid-in capital 14,213 7,086 3,810

Retained earnings 5,840 1,191 900

Total stockholders’ equity 20,236 8,333 4,747

Total liabilities and stockholders’ equity $ 29,082 $ 14,387 $ 8,335

Income Statement

Statements of Income

For the Periods Ending June 30, 20X3, 20X2, and 20X1

(In Thousands)

20X3 20X2 20X1

Sales $ 18,848 $ 12,445 $ 8,213

Cost of goods sold 10,598 6,833 4,523

Gross profit 8,250 5,612 3,690

General and administrative expenses 967 3,366 1,889

Research and development costs 149 1,335 895

Income from operations 7,134 911 906

Net interest expense 217 64 161

Loss on sale of receivables, factored – 0 – 0 77

Income before income taxes 6,917 847 668

Provision for income taxes 2,268 556 284

Net income $ 4,649 $ 291 $ 384

PPE Schedule

Schedule of Equipment and Leasehold Improvements

20X1

Beginning Ending

Balance Additions Retirements Balance

Equipment 626,510 131,440 16,610 741,340

Leasehold Improvements 143,421 15,565 – 0 158,986

769,931 147,005 16,610 900,326

20X2

Beginning Ending

Balance Additions Retirements Balance

Equipment 741,340 307,790 40,602 1,097,528

Leasehold Improvements 158,986 46,885 – 0 205,871

900,326 354,675 40,602 1,303,399

20X3

Beginning Ending

Balance Additions Retirements Balance

Equipment 1,097,528 6,953,306 125,864 7,924,970

Leasehold Improvements 205,871 135,642 – 0 341,513

1,303,399 7,088,948 125,864 8,266,483

Depreciation Schedule

Depreciation Schedule

20X1

Beginning Ending

Balance Additions Retirements Balance

Equipment 185,696 84,325 14,500 255,521

Leasehold Improvements 24,668 19,768 – 0 44,436

210,364 104,093 14,500 299,957

20X2

Beginning Ending

Balance Additions Retirements Balance

Equipment 255,521 105,718 35,101 326,138

Leasehold Improvements 44,436 23,144 – 0 67,580

299,957 128,862 35,101 393,718

20X3

Beginning Ending

Balance Additions Retirements Balance

Equipment 326,138 1,024,587 109,875 1,240,850

Leasehold Improvements 67,580 17,828 – 0 85,408

393,718 1,042,415 109,875 1,326,258