A company, ABC Inc., is under investigation for financial statement fraud. As a forensic accountant, you have
Question:
A company, ABC Inc., is under investigation for financial statement fraud. As a forensic accountant, you have been asked to analyze the company's financial statements and identify any potential red flags. You have obtained the following financial information for the current year:
Sales revenue: $10,000,000
Cost of goods sold: $4,000,000
Accounts receivable: $1,500,000
Allowance for doubtful accounts: $100,000
Inventory: $2,500,000
Property, plant, and equipment: $7,500,000
Accumulated depreciation: $2,500,000
Accounts payable: $1,000,000
Notes payable: $2,500,000
Common stock: $5,000,000
Retained earnings: $3,500,000
Using this information, answer the following questions:
(a) Calculate the gross profit margin ratio for the current year. Interpret the ratio and explain what it indicates about the company's profitability.
(b) Calculate the current ratio and quick ratio for the current year. Interpret the ratios and explain what they indicate about the company's liquidity.
(c) Calculate the debt-to-total-assets ratio and the times interest earned ratio for the current year. Interpret the ratios and explain what they indicate about the company's solvency.
(d) Calculate the return on equity ratio for the current year. Interpret the ratio and explain what it indicates about the company's profitability.
(e) Based on your analysis, do you identify any potential red flags? Explain your answer.
Note: Round all ratios to two decimal places.
Fundamentals of Financial Accounting
ISBN: 978-0078025914
5th edition
Authors: Fred Phillips, Robert Libby, Patricia Libby