XYZ Company has recently experienced a significant increase in its revenues, which has led to suspicion of potential financial statement fraud. The company's financial statements for the past two years are as follows:

Year 1:

• Revenues: $2,000,000
• Cost of Goods Sold (COGS): $1,000,000
• Gross Profit: $1,000,000
• Net Income: $500,000

Year 2:

• Revenues: $4,000,000
• Cost of Goods Sold (COGS): $1,500,000
• Gross Profit: $2,500,000
• Net Income: $1,500,000

The company's inventory balance at the end of Year 1 was $400,000, and the inventory turnover ratio for Year 1 was 5. The inventory balance at the end of Year 2 was $800,000, and the inventory turnover ratio for Year 2 was 6.

a) Calculate the company's gross profit margin and net income margin for each year.

b) Calculate the average number of days of inventory on hand for each year. c) Analyze the changes in the company's gross profit margin, net income margin, and inventory turnover ratio from Year 1 to Year 2, and comment on the potential for financial statement fraud.

Answer rating: 100% (QA)

The detailed answer for the above question is provided below a Gross profit margin revenues COGS revenues Net income margin net income revenues For Ye... View the full answer