Instructions

$($Problem $6$C$-4)$

For the first task of the Audit Case Review, you will recalculate the analytical review ratios for the Keystone Computers & Networks. The working paper on page $290$ shows the ratios prepared by the auditors. Use this working paper as a reference to perform the following procedures:

a$.$ Use the worksheet on page $2$ to recalculate the ratios for $12/31/$X$5.$ Refer to the Working Trial Balance on pages $288-289$ to calculate the ratios. Show your work on the worksheet and insert the results below in the column titled $12/31/$X$5.($SPOILER ALERT: Your recalculation ratios should be equal to the ratios on page $290.$ So now you know the answers. But I want to know how you calculated these ratios. Therefore, show your work on page $2.)$ KMG note $$ See excel attachment $$Task $1$ Worksheet $$ KMG $-2\mathrm{.}26\mathrm{.}24$

Keystone Computers & Networks, Inc.

Analytical Review Ratios For the Period Ended December $31,20$X$5$

$12/31/$X$512/31/$X$4$ Industry

Current Ratio $1\mathrm{.}11\mathrm{.}2151\mathrm{.}300$

Days' Sales in Accounts Receivable, Computed with Average Accounts Receivable $37\mathrm{.}09$

$33\mathrm{.}2$

$37\mathrm{.}000$

Allowance for Doubtful Accounts $/$ Accounts Receivable $1\%1\mathrm{.}1\%------$

Bad Debt Expense $/$ Net Sales $\mathrm{.}3\%0\mathrm{.}2\%------$

Total Liabilities to Net Worth $3\mathrm{.}52\mathrm{.}72\mathrm{.}900$

Return on Total Assets $1\mathrm{.}7\%8\mathrm{.}3\%9\mathrm{.}0\%$

Return on Net Worth $7\mathrm{.}5\%30\mathrm{.}5\%29\mathrm{.}0\%$

Return on Net Sales $\mathrm{.}2\%1\mathrm{.}0\%2\mathrm{.}3\%$

Gross Profit $/$ Net Sales $22\mathrm{.}1\%23\mathrm{.}2\%24\mathrm{.}0\%$

Selling, Operating and Administrative Expense $21\mathrm{.}2\%21\mathrm{.}4\%23\mathrm{.}9\%$

Times Interest Earned $1\mathrm{.}74\mathrm{.}15\mathrm{.}5$

b$.$ After completing part $($a$),$ review the ratios and identify below the financial statement accounts that should be investigated because the related ratios are not comparable to prior$-$year ratios, industry averages, or your knowledge of the company.

c$.$ For each account identified in part $($b$),$ list potential reasons for the unexpected account balances and related ratios.

$$

Case $6$C$-4$ Details of Computations of $20$X$5$ ratios

Current Ratio

Current Assets $/$ Current Liabilities

Days Sales in A$/$R Computed

with Average A$/$R

Sales per day $=$ Sales $/365$

$=$

Average A$/$R $=($Beg$.$ A$/$R $+$ End A$/$R$)/2$

$=$

Days sales $=$ Average A$/$R $/$ Sales per day

$=$

Allowance for Bad Debts $/$ A$/$R

Bad Debts Expense $/$ Net Sales

Inventory Turnover Computed with Average Inventory

Average Inv. $=($Beg$.$ Inv. $+$ End Inv$)/2$

$=$

Inv. Turnover $=$ Cost of Goods Sold $/$ Average Inv.

$=$

Days Inventory Computed with Average Inventory

CGS per day $=$ Cost of Goods Sold $/365$

$=$

Days Inv. $=$ Average Inv. $/$ CGS per day

$=$

Total Liabilities to Net Worth

Total Liabilities $/$ Stockholders' Equity

Return on Total Assets

Net Income $/$ Total Assets

Return on Net Worth

Net Income $/$ Stockholders' Equity

Return on Net Sales

Net Income $/$ Net Sales

Gross Profit $/$ Net Sales

Gross Profit $/$ Net Sales

Selling, Operating and Admin. Expense $/$ Net Sales

Selling, Operating and Admin. Exp. $/$ Net Sales

Times Interest Earned

Operating Income $/$ Interest Expense