The Regina Company, Inc. ("Regina") was engaged in the manufacture and marketing of various
household equipment, such as vacuum cleaners and whirlpools.
Regina's financial statements are on the following two pages. Use these financial statements to
answer the following questions:
1. Prepare a vertical analysis on the financial statements.

2. Based on the results of question #1, what relationships appear to be out of alignment?

3. Is the relationship between sales and cost of goods sold linear?

4. Should the relationship between sales and cost of goods sold be linear?
a. If so, why?
b. If not, why not?

5. Can you identify the potential fraud?
a. If so, how did you determine there was a potential fraud?
b. If not, what other information would help determine if there is a potential fraud?

Regnia Company Statement of Income

Statement of income	12/31/86	12/31/87	12/31/88
(In thousands)	(Audited)	(Audited)	(Audited)
Net Sales	$76,144	$128,234	$181,123
Cost of Goods Sold	46,213	70,756	94,934
Gross Margin	29,931	57,478	86,189
General Expenses	20,105	42,600	64,285
Operating Income	9,826	14,878	21,904
Interest Expense	1,930	1,584	3,189
Income Taxes	3,807	6,189	7,761
Net Income	4,089	7,105	10,954
Earnings Per Share	0.46	0.78	1.21

Regina Company Balance Sheet

Balance Sheet	12/31/86	12/31/87	12/31/88
(In Thousands)	(Audited)	(Audited)	(Audited)
Assets
Cash	$63	$514	$885
Accounts Receivable	14,402	27,801	51,076
Inventories	9,762	19,577	39,135
Other Current Assets	708	1,449	3,015
Total Current Assets	24,935	49,341	94,111
Fixed Assets	19,523	19,736	27,884
Accum Depreciation	(3,140)	(4,948)	(6,336)
Other Assets	1,884	1,112	2,481
TOTAL ASSETS	$43,202	$65,241	$118,140
LIABILITIES & EQUITY
Lines Of Credit	2,707	0	0
Current Portion-L/T Debt	0	900	1,250
Accounts Payable	7,344	15,072	13,288
Accrued Liabilities	3,127	5,468	4,710
Income Taxes Payable	1,554	2,619	3,782
Total Current Liabilities	14,732	24,059	23,030
Bonds Payable	14,800	13,900	14,625
Bank Debt	0	5,941	47,432
Deferred Income Taxes	685	1,254	1,881
Total Liabilities	30,217	45,154	86,968
Common Stock	1	1	1
Additional Paid in Capital	8,010	8,018	8,023
Retained Earnings	5,210	12,315	23,269
Currency Adjustments	0	0	126
Treasury Stock	(236)	(247)	(247)
Total Liabilities & Equity	$43,202	$65,241	$118,140

Answer rating: 100% (QA)

Vertical analysis of the financial statements for Regina Company Inc Vertical Analysis of Net Sales 123186 123187 123188 Net Sales 10000 10000 10000 Cost of Goods Sold 6067 5521 5240 Gross Margin 3933 ... View the full answer