Question

Horizontal analysis refers to changes in financial statement numbers and ratios across two or more years. Vertical analysis refers to financial statement amounts expressed each year as proportions of a base, such as sales for the income statement accounts, and total assets for the balance sheet accounts.
Exhibit EP 7-4–1 contains the Retail Company’s prior year (audited) and current year (unaudited) financial statements, along with amounts and percentages of change from year to year (horizontal analysis) and common-size percentages (vertical analysis).
Exhibit EP 7-4–2 contains selected financial ratios based on these financial statements. Analysis of these data may enable auditors to discern relationships that raise questions about misleading financial statements.

Required:
Study the data in Exhibits EP 7-4–1 and EP 7-4–2. Write a memo identifying and explaining potential problem areas where misstatements in the current year financial statements might exist.
Additional information about Retail Company is as follows:
• The new bank loan, obtained on July 1 of the current year, requires maintenance of a 2:1 current ratio.
• Principal of $100,000 plus interest on the 10% long-term note obtained several years ago in the original amount of $800,000 is due each January 1.
• The company has never paid dividends on its common shares and has no plans for a dividend.
EP 7-4–1



EP7-4–2


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  • CreatedJanuary 09, 2015
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