Practice Work: Week 5

Q1. The following information is provided about Ricky Handwoven Carpets: ( in 000s)

Ricky Handwoven Carpets
Balance Sheet
	2022	2023
Cash	58	73
Receivables	4,579	3,928
Inventories	3,624	6,415
Total Current Assets	8,261	10,416
Non Current Assets
Property Plant & Equipment	28,763	25,049
Receivables	2,000	2,000
Non-current assests	30,763	28,626
Total Assets	39,024	37,465
Current liabilities
Bank borrowings	5,000	7,500
Trade creditors	2,500	2,473
Provisions	643	610
Total Current Liabilities	8,143	10,583
Non-Current liabilities
Bank loan	22,000	20,000
Provisions	547	510
Total Non-current liabilities	22,547	20,510
Total liabilities	30,690	31,093
Net Assets	8,334	6,372
Equity
Contributed capital	5,000	5,000
Retained profits	3,334	1,372
Total Equity	8,334	6,372

Ricky Handwoven Carpets
Income statement
	2022	2023
Revenue	20,007	19,943
Expenses	13,305	15,428
Gross Profit	6,702	4,515
Operating Expenses	3,486	3,047
Profit before tax	3,216	1,468
Income tax expense	1,254	572
Net profit	1,962	896

Additional information:

1. Inventory value in 2021 was $992 and Account receivables in 2021 $2128 (in 000s).

1. The company is a subsidiary of an American group quoted on the NYSE.

2. Your audit firm provides the audit report for the NY and the Australian office.

3. The company manufactures carpets and 80% is for export.

4. Wool, the primary raw material, is purchased in Australia. The management has informed you that the recent fall in wool prices has improved your profitability

5. The US parent company is displeased with the Australian subsidiaries performance in 2022 and intends to pay close attention to its performance in 2023.

6. 80% of the company's account receivables are overseas customers with a 60-day credit term.

7. There have been complains about the quality of the carpets.

Required:

1. Perform the following ratio analysis.

Current ratio
Quick ratio
Average inventories
Inventory turnover ratio
Accounts receivable turnover ratio
Return on sales ratio
Debt-to-equity ratio
Gross margin ratio

2. Based solely on your calculations above, identify areas that you should investigate further. Explain why.

3. Identify the potential risk factors (financial and non-financial) that might indicate chances of fraud in the area of:

a. Inventories

b. Receivables