Financial Analysis

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FinancialStatementFraudProblems.xlsx
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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