Practical Problem

Read and complete the following exercise.

ZZZZ BEST Co., Inc.

ZZZZ BEST Co., Inc. (the Company) was organized on December 6, 1985, as a non-operating parent company of a sole proprietorship that had operated since 1981. The Company provided professional residential and commercial carpet, upholstery, and drapery cleaning services from its eleven locations throughout California. Customers included homeowners; owners and operators of commercial establishments, such as hotels, restaurants, apartment complexes, and office buildings; and two firms of adjusters representing various insurance companies. The insurance-related work typically involved the restoration or replacement of carpets and other furnishings that had been damaged or destroyed as a result of extensive water or fire casualties.

On November 3, 1986, the Company filed a Form S-1 (Registration Statement) with the Securities and Exchange Commission. The purpose of the registration statement was to raise approximately $9 million in capital. The preceding description of the business and the following facts are excerpted from that registration statement.

Beginning in about April 1985, the insurance restoration work supposedly became an increasingly important part of the Company'sbusiness. In certain cases, to obtain necessary financing, the Company claimed it undertook restoration contracts through joint ventures with unaffiliated parties. During the year ending April 30, 1986, and the three months ending July 31, 1986, approximately 55 percent and 14 percent, respectively, of the Company'srevenue was generated from residential and commercial customers, and 45 percent and 86 percent, respectively, reputedly came from its insurance restoration business (not including revenue from restoration work performed by the Company through joint ventures).

Between August 1 and September 10, 1986, revenue from the Company'sreported insurance restoration

projects supposedly aggregated $4,957,920, including $1,940,213 through joint ventures. As of September 30, 1986, the Company allegedly was working on 13 contracts aggregating $24,362,000 of which seven, aggregating $15,068,000, were through joint ventures. The restoration work was accounted for under the percentage-of-completion method of accounting.

Typically, the Company'sjoint venture partners arranged for the financing (e.g., short-term bank loans) necessary to undertake the restoration projects. This financing supposedly covered the costs of materials and supplies, employee transportation and lodging costs, payroll, and other expenses estimated to be incurred before the first progress payment was received from the insurance adjuster (generally, after approximately 25 percent of the work had supposedly been performed). The Company was primarily liable for the debt and the joint venturer was secondarily liable.

The profitability of a restoration contract depended on the Company'sability to control its expenses, the principal one of which was the cost of replacing the flooring materials. The Company claimed it had available a pool of approximately 200 experienced people capable of performing the restoration work, 90 of whom were Company employees and 110 of whom were independent contractors. Most of these people were supposedly located in Southern California and were deployed, as needed, to the various project sites.

Using the facts above and the financial information on the attached pages, complete the following:

Have a need for help in particular with question 4; need a graph using data from questions 1-3. Need editable file I can adjust (in excel) not image file.

1) A vertical analysis for each of the following three periods:

? Fiscal Year Ended April 30, 1985

? Fiscal Year Ended April 30, 1986

? Quarter Ended July 31, 1986

2) The following two horizontal analyses:

? Compare Fiscal Year Ended April 30, 1985, to Fiscal Year Ended April 30, 1986

? Compare Fiscal Year Ended April 30, 1985, to Quarter Ended July 31, 1986

3) A summary of the balance sheet and operations ratios that pertain to the operations of the Company. Refer to Appendix A for formulas for common ratios.

4) Based on your answers to questions 1, 2, and 3 above, what relationships indicate that further investigation might be prudent? Include a graph of the items that you consider worthy of further investigation.

Schemes ZZZZ BEST Co., Inc. As of As of As of BALANCE SHEET 4/30/85 4/30/86 7/31/86 ASSETS Cash $ 30,321 $ 87,014 $ 9,907 Accounts Receivable 693,773 2,461,098 Unbilled Charges on Restorations 428,810 Advances-Joint Venture 117,108 0 Advances on Materials 0 136,000 1,330,000 Prepaid Expenses 25,364 125,307 59,392 Other 51,411 139,961 382,592 Total Current Assets $ 107,096 $ 1,727,973 $ 4,242,989 Fixed Assets 125,519 2,564,632 3,254,191 Accum. Depreciation (68,029) (163,145) (268,796) Capitalized Leases 655,733 710,652 Deposits 13,450 235,994 237,189 Other Assets 24,484 23,866 TOTAL ASSETS $178,036 $5,045,671 $8,200,091 LIABILITIES and EQUITY Notes Payable-Current $ 0 $ 780,507 $1,971,624 Equip. Purchases Payable 575,000 Accounts Payable 2,930 237,340 362,916 Current Portion-Leases 0 147,561 157,556 Income Taxes Payable 28,027 65,160 Overbilled Charges on Restorations 0 107,301 Deferred Income Taxes 1,400,139 Current Portion-Notes 0 40,000 Total Current Liabilities 2,930 1,768,435 4,104,696 Notes Payable 0 515,000 Leases Payable 428,471 418,195 Deferred Income Taxes 0 819,014 236,496 TOTAL LIABILITIES $2,930 $3,015,920 $5,274,387 Common Stock 55,000 76,675 76,675 Add'l Paid in Capital 55,000 942,325 942,325 Retained Earnings 65,106 1,010,751 1,906,704 TOTAL LIABILITIES & EQUITY $178,036 $5,045,671 $8,200,091 Cooking the Books 125Schemes ZZZZ BEST Co., Inc. FYE FYE FOE STATEMENT OF INCOME 4/30/85 4/30/86 7/31/86 Net Sales $1,240,524 $4,845,347 $5,395,754 Costs of Goods Sold 576,694 2,050,779 2,976,205 Gross Margin 663,830 2,794,568 2,419,549 General Expenses 306,016 1,125,541 622,811 Joint Venture Income 186,679 102.066 Operating Income 357,814 1,855,706 1,898,804 Interest Expense 43,020 64,097 Income Taxes-Current 36,053 48.027 121,133 Income Taxes-Deferred 0 819.014 817,621 Net Income $321,761 $945,645 $895,953 Earnings per Share $0.04 $0.12 $0.11 126 Cooking the Books