Finance Homework Chapter 12 – CHIPMUNK COMPANY

| June 11, 2016

Question
Homework for Chapter 12

You are a fraud investigator who has been hired to detect financial statement fraud for Chipmunk Company.

You have been provided with the following financial statements and are now beginning your analysis of

the financial statements.

CHIPMUNK COMPANY

Statement of Income and Retained Earnings

For the years ended December 31, 2008 and 2007

2008 2007

Sales $26,456,647 $22,889,060

Sales returns and allowances 37,557 27,740

Net Sales 26,419,090 22,861,320 $3,557,770 13%

Cost of sales 19,133,299 16,530,114

Gross Profit 7,285,791 6,331,206

Expenses

Accounting 48,253 46,750

Advertising 28,624 27,947

Depreciation 46,415 46,578

Bad Debts 148,252 162,344

Business publications 1,231 872

Cleaning services 15,817 12,809

Fuel 64,161 53,566

Gargage collection 4,870 4,674

Insurance 16,415 16,303

Interest 427,362 364,312

Legal 69,752 29,914

Licensing and certification fees 33,580 27,142

Linen service 3,044 1,939

Medical benefits 4,178 4,624

Miscellaneous 47,739 16,631

Office supplies 26,390 23,289

Payroll benefits 569,110 461,214

pension expense 40,770 37,263

Postage and courier 8,623 20,962

Property taxes 3,978 27,947

Rent 158,526 120,000

Repairs and maintenance 51,316 26,439

Salaries and wages 4,310,281 3,970,092

Security 96,980 100,098

Telephone 5,707 7,092

Travel and entertainment 21,633 16,303

Utilities 63,329 41,919

Total Expenses 6,316,336 5,669,023

Net income before income tax 969,455 662,183

Income tax expense 344,605 239,406

NET INCOME $624,850 $422,777

Retained earnings at beginning of year 6,518,413 6,195,636

Less: Dividends 100,000 100,000

Retained earnings at end of year $7,043,263 $6,518,413

CHIPMUNK COMPANY

Balance Sheet

December 31, 2008 and 2007

2008 2007

ASSETS

Current Assets

Cash 1,320,096 1,089,978 230,118 17%

Accounts Receivable: net 1,646,046 1,285,593 360,453 22%

Inventories 15,524,349 12,356,400

Prepaid expenses 17,720 15,826

Deposits 7,916 5,484

Total current assets 18,516,127 14,753,281

Property, plant, and equpment

at cost, less accumulated depreciation 596,517 612,480

TOTAL ASSETS $19,112,644 $15,365,761

LIABILITIES

Current liabilities

Notes payable-Bank $5,100,000 $4,250,000

Accounts payable 1,750,831 1,403,247

Accrued liabilities 257,800 217,003

Federal income taxes payable 35,284 45,990

Current portion of long-term debt 5,642 5,642

Total Current liabilities $7,149,557 $5,921,882

Long-term liabilities

Lont-term debt 409,824 415,466

TOTAL LIABILITIES $7,559,381 $6,337,348

STOCKHOLDERS’ EQUITY

Common Stock $10,000 $10,000

Additional paid-in capital 2,500,000 2,500,000

Retained earnings 7,043,263 6,518,413

Total stockholders’ equity $9,553,263 $9,028,413

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY $17,112,644 $15,365,761

Note: Inventories balance on January 1, 2007 was $11,427,937

a) Prepare the vertical analysis

b) Prepare the horizontal analysis’ I have reviewed the received financials. As a fraud investigator, I have noted several items of concern. The areas of concern include, the current ratio declined by 9.8% which indicates there may be possible fraud in the cash or the accounts receivable. Expenses, specifically “miscellaneous” expenses drastically increased YOY by 65%. Repairs and maintenance doubled which is either an indication of aging equipment or falsely billing the company for work that did not occur.

c) Prepare the ratios found on page 359 for 2007 and 2008 2008 2007 Change % Change

Current ratio 2.59 2.49 0.09851 4%

Quick ratio 0.41 0.40 0.01372 3%

Receivable Turnover 18.02 15.59 2.43000 13%

Collection ratio 20.26 23.41 -3.15717 -16%

Inventory turnover 1.37 1.19 0.18000 13%

Average number of days inventory in stock 266.42 306.72 -40.29933 -15%

Debt to Equity 0.79 0.70 0.08935 11%

Profit Margin 2.37% 1.85% 0.00516 22%

Asset turnover 1.53 1.33 0.20000 13%

d) Analyze the ratios and indicate where you think fraud may have occurred

e) What additional questions would you have for management? After reviewing your financials, I have the following additional questions:

1. What items were expensed in the miscellaneous expense account?

2. What caused maintenance expenses to double?

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