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4.56 Preliminary Analytical Procedures. Dunder-Mitlin Inc. wanted to expand its manufacturing and sales facilities. The company applied for a loan from First Bank, presenting the prioryear audited financial statements and the forecast for the current year shown in Exhibit 4.56.1. (Dunder-Mifflin Inc.'s fiscal yearend is December 31.) The bank was impressed with the business prospects and granted a $1,750,000 loan at 8 percent interest to finance working capital and the new facilities that were placed in service July 1 of the current year. Because Dunder Mifflin Inc. planned to issue stock for permanent financing, the bank made the loan due on December 31 of the following year. Interest is payable cach calendar quarter on October 1 of the current year and January 1, April 1, July 1, October 1 of the following year. Page 162 EXHIBIT 4.56.1 Dunder Mifflin Inc. Prior Year (audited) Current Year (unaudited) Forecast Revenue and Expense: Sales (net) $9.000.000 $9.900,000 $9.720,000 Cost of goods sold 6.296,000 6926,000 2.000.000 Gross margin 2,704,000 2.974,000 2,720,000 General expense 2,044,000 2,000,000 2.003,000 Depreciation 300,000 334,000 334,000 Operating income 360,000 640,000 383,000 Interest expense 60,000 110,000 75,000 Income taxes (40%) 120.000 212.000 123,200 Net income 180.000 318,000 184,800 Assets: Cash 600,000 880,000 690.800 Accounts receivable 500,000 600,000 900,000 Allowance for doubtful accounts (40,000) (48.000) (90,000) Cost of goods sold 6,296,000 6,226,000 7,000,000 Gross margin 2.704,000 2,974,000 2.720,000 General expense 2.044.000 2,000,000 2,003.000 Depreciation 300.000 3:34.000 314,000 Operating income 360,000 640,000 383.000 Interest expense 60,000 110,000 75,000 Income taxes (40%) 120,000 212.000 123,200 Net income 180.000 318.000 184,800 Assets: Cash 600,000 880,000 690.800 Accounts receivable 500,000 600,000 900,000 Allowance for doubtful accounts (40,000) (48,000) (90,000) Inventory 1.500.000 1.500.000 1.350.000 Total current assets 2.560,000 2.932,000 2.850.800 Fixed assets 3,000,000 4.700,000 4,500,000 Accumulated depreciation (1.500.000) (1.834,000) (1.834,000) Total assets $ 4,060,000 $5.798.000 $5,516,800 Liabilities and Equity Accounts payable $ 450.000 $ 450,000 $ 330,000 Bank loans, 8% 0 1.750,000 1.750.000 Accrued interest 60,000 40,000 40,000 Accruals and other 50.000 60.000 32.000 Total current liabilities $ 560,000 $2,300,000 $2,152,000 600,000 400,000 Long-term debt, 10% 400,000 Total liabilities S1.160,000 $2,700,000 $2.552.000 Total assets $ 4,060,000 $5,798,000 $5.516.800 Liabilities and Equity: Accounts payable $ 450,000 $ 450,000 $ 330,000 Bank loans, 8% 0 1.750,000 1.750,000 Accrued interest 60,000 40,000 40,000 Accruals and other 50,000 60,000 32,000 Total current liabilities $ 560,000 $2,300,000 $2.152.000 600,000 Long-term debt, 10% 400,000 400,000 Total liabilities $1,160,000 $2,700,000 $2,552,000 2,000,000 2,000,000 2,000,000 Capital stock 900,000 1,098,000 964,800 Retained earnings Total liabilities and equity $4,060.000 $5,798,000 $5.516.800 The auditors' interviews with Dunder Mifflin Inc, management near the end of the current year produced the following information: The facilities did not cost as much as previously anticipated. However, sales were slow and the company granted more liberal return privilege terms than in the prior year. Officers wanted to generate significant income to impress First Bank and to preserve the company dividend ($120,000 paid in the prior year). The production managers had targeted inventory levels for a 4.0 turnover ratio and were largely successful even though prices of materials and supplies had risen about 2 percent relative to sales dollar volume. The new facilities were depreciated using a 25-year life from the date of opening. Dunder-Mifflin Inc. has now produced the current-year financial statements Exhibit 4.56.1. Current Year column) for the auditors' work on the current audit. Required: Perform preliminary analytical procedures on the current-year unaudited financial statements for the purpose of identifying accounts that could contain errors or frauds. Use your knowledge of Dunder-Mifflin Inc. and the forecast in Exhibit 4.56.1. Calculate comparative and common-size financial statements as well as relevant ratios. (Assume that the market value of the equity for the company is $3 million) Once your calculations are complete, identify the accounts that could be misstated