ACCY 306 Chapter Notes - Chapter 5: Audit, Industry Classification, Statistical Classification
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Analytical Procedures
You have been assigned to the 2015 audit of Perkins Corp. Youmet with the controller of the company who provided you with the2015 operatung results shown below. Your supervisor has asked youto perform the preliminary analytic review. The supervisor hasasked you to use the audited data from the prior four year (shownbelow) as part of your reveiw. The supervisor has also provided youwith a few ratios that she would like you to look at.
Required:
A. Prepare a horizontal AND a vertical analysis using the 5 yearsof financial data provided. (HINT: Another term for horizantalanalysis is "trend" analysis. Vertical analysis is also referred toas "common size" analysis.) You do not need to prepare thisanalysis for the two balance sheet account shown.
B. Determine the ratios that were requested by your supervisor foreach year (below).
C. MOST IMPORTANT: Identidy five account, ratios, or trends thatmight concern you as the auditor of the 2015 statements. Remember,you're looking for unusual relationships or significantchanges that might identify an area that will need moretesting.
Operating Results | |||||
2011 | 2012 | 2013 | 2014 | 2015 | |
Revenues | 1,750,000 | 1,872,500 | 2,033,575 | 1,883,361 | 2,034,029 |
Cost of goods sold | (1,050,00) | (1,217,125) | (1,362,431) | (1,205,351) | (1,261,098) |
Gross Profit | 700,000 | 655,375 | 641,144 | 678,010 | 772,931 |
Salaries expense | 350,000 | 360,500 | 367,710 | 360,356 | 374,770 |
Advertising expense | 91,000 | 87,500 | 35,000 | 40,250 | 122,500 |
Facilities expense | 85,000 | 86,700 | 88,868 | 87,090 | 91,445 |
Payroll tax expense | 38,500 | 37,853 | 42,287 | 42,882 | 29,982 |
R & M expense | 28,000 | 29,120 | 30,139 | 31,345 | 21,001 |
Depreciation expense | 14,500 | 14,500 | 13,775 | 13,637 | 10,910 |
Interest expense | 8,300 | 8,317 | 8,135 | 8,053 | 7,973 |
Legal fees expense | 3,500 | 4,200 | 3,800 | 5,600 | 14,562 |
(618,800) | (628,590) | (589,713) | (589,214) | (673,142) | |
Operation Income | 81,200 | 26,786 | 51,431 | 88,796 | 99,789 |
Selected accounts from balance sheet | |||||
Average pp&e | 145,000 | 131,818 | 172,188 | 123,975 | 181,830 |
Average Debt | 166,000 | 161,118 | 135,581 | 129,895 | 130,704 |
Selected ratios: (do for each year)
A) Depreciation as a % of PP&E
B) R&M as a % of PP&E
C) Interest as a % of Debt
D) Payroll taxes as a % of Salaries
1. Which of thefollowing below generally is the most useful in analyzing companiesof different sizes
a. | comparative statements |
b. | common-sized financialstatements |
c. | price-level accounting |
d. | audit report |
2. What type ofanalysis is indicated by the following?
|
|
| Increase(Decrease*) | |
| 2010 | 2009 | Amount | Percent |
Current assets | $ 380,000 | $ 500,000 | $120,000* | 24%* |
Fixed assets | 1,680,000 | 1,500,000 | 180,000 | 12% |
a. | vertical analysis |
b. | horizontalanalysis |
c. | liquidity analysis |
d. | common-size analysis |
3. Assume thefollowing sales data for a company:
| 2010 | 750,000 |
| 2009 | 500,000 |
What is the percentage increase in sales from 2009 to 2010?
a. | 25% |
b. | 66.7% |
c. | 50% 250,000/500,000 = .5 or 50% |
d. | 150% |
4. In performing avertical analysis, the base for cost of goods sold is
a. | Total selling expenses. |
b. | Net sales. |
c. | Total expenses. |
d. | Total revenues. |
5. The ability of abusiness to pay its debts as they come due and to earn a reasonableamount of income is referred to as
a. | solvency and leverage |
b. | solvency and profitability |
c. | solvency andliquidity |
d. | solvency and equity |
6. Which of thefollowing is not an analysis usedin assessing solvency?
a. | number of times interest charges are earned |
b. | current position analysis |
c. | ratio of net sales toassets |
d. | inventory analysis |
7. A company withworking capital of $500,000 and a current ratio of 2.5 pays a$85,000 short-term liability. The amount of working capitalimmediately after payment is
a. | $585,000 |
b. | $415,000 |
c. | $500,000 |
d. | $85,000 |
8. Based on thefollowing data for the current year, what is the accountsreceivable turnover?
Net sales on account during year | $500,000 |
Cost of merchandise sold during year | 300,000 |
Accounts receivable, beginning of year | 45,000 |
Accounts receivable, end of year | 35,000 |
Inventory, beginning of year | 90,000 |
Inventory, end of year | 110,000 |
a. | 12.5 =$500,000/ 40000 = 12.5 (45,000+35,000)/2 =40,000 |
b. | 11.1 |
c. | 10.0 |
d. | 14.3 |
9. Based on thefollowing data for the current year, what is the inventoryturnover?
Net sales on account during year | $500,000 |
Cost of merchandise sold during year | 330,000 |
Accounts receivable, beginning of year | 45,000 |
Accounts receivable, end of year | 35,000 |
Inventory, beginning of year | 90,000 |
Inventory, end of year | 110,000 |
a. | 3.3 $330,000 /100,000 =3.3 |
b. | 8.3 |
c. | 3.7 |
d. | 3.0
|
10. The primary advantages of theaverage rate of return method are its ease of computation and thefact that:
a. | it is especially useful to managers whose primary concern isliquidity |
b. | there is less possibility of loss from changes in economicconditions and obsolescence when the commitment is short-term |
c. | it emphasizes the amountof income earned over the life of the proposal |
d. | rankings of proposals are necessary |
11. The expected average rate ofreturn for a proposed investment of $800,000 in a fixed asset, witha useful life of four years, straight-line depreciation, noresidual value, and an expected total net income of $240,000 forthe 4 years, is:
a. | 30% |
b. | 15% |
c. | 60% |
d. | 7.5% |
1. Apply to actual companies the basic knowledge and analytical techniques learned from our course.
2. Prepare common-size financial statements, comparative financial statements, and various profitability and risk ratios.
3. Compare the calculated results with competitors and across different years.
4. Summarize the analyses and make investment recommendations.
You will be analyzing the following firms:
Williams-Sonoma, Inc.
Pier 1 Imports, Inc.
For these firms, download the most recent annual report (10-K report) to begin your work. In 10-K reports, you can find companiesâ basic information, financial statements, footnotes to the financials, and the management discussions and analyses. Please download the 10-K reports from the following web links:
10-K reports (fiscal year 2016) for Williams-Sonoma, Inc.
https://www.sec.gov/Archives/edgar/data/719955/000119312517104341/d265187d10k.htm
10-K reports (fiscal year 2015) for Williams-Sonoma, Inc.
https://www.sec.gov/Archives/edgar/data/719955/000119312516525847/d120289d10k.htm
10-K reports (fiscal year 2014) for Williams-Sonoma, Inc.
https://www.sec.gov/Archives/edgar/data/719955/000119312515118009/d851953d10k.htm#tx851953_13
10-K reports (fiscal year 2016) for Pier 1 Imports, Inc.
https://www.sec.gov/Archives/edgar/data/278130/000119312517136345/d343458d10k.htm
10-K reports (fiscal year 2015) for Pier 1 Imports, Inc.
https://www.sec.gov/Archives/edgar/data/278130/000119312516556025/d133529d10k.htm
10-K reports (fiscal year 2014) for Pier 1 Imports, Inc.
https://www.sec.gov/Archives/edgar/data/278130/000119312515153179/d881010d10k.htm#toc881010_13
For your convenience, I also provided the balance sheet and income statement of each company for the most recent years at the end (page 5-8; Table 1-4). Please use them to prepare common-size financial statements and comparative financial statements.
Guidance
The required tasks are detailed below:
(1) Prepare common-size balance sheets and income statements for both companies. Note: Compute for the most recent THREE years.
(2) Prepare comparative analysis (i.e., change of percentage analysis) on income statement and balance sheet for both companies. You should compute for the most recent THREE years.
(3) Prepare ratio analyses (for the same THREE year time period) for both companies. At least, you should include the following ratios in your computations: (1) current ratio, (2) acid-test ratio, (3) receivables turnover, (4) inventory turnover, (5) asset turnover, (6) profit margin on sales, (7) rate of return on assets, (8) rate of return on common stock equity, (9) earnings per share, (10) payout ratio, (11) debt to total assets ratio, (12) times interest earned, (13) cash debt coverage ratio, and (14) book value per share.
(4) Comment on the analytical results of the two companies. Your comments should concentrate on the trends across the companies. In addition to contrasting the ratios between the companies, you should interpret the numbers and make suggestions as to why the ratio of one company might be higher/lower than the other.
(5) Write a conclusive summary on the firms you have studied. Based upon your conclusions, recommend the better performing firm for potential investment. Your conclusions should be based upon, and specifically reference, the analyses prepared in this report.
(6) Read sample project to get some ideas.
Report Format Requirements:
A. Report body requirements:
Cover page. List the title of the project, your names, and semester/year.
Abstract or Executive Summary. This is a separate page. It should cover the purpose of the project, the major findings, and the conclusions/recommendations, in summary form.
Table of Contents.
Main body. Use the following sequence for report content:
Introduction to the two companies and to the purpose of the report
Analytical section. This should include all your numerical analyses. This is where you will discuss the results of, comments on, and conclusions about the vertical and horizontal common-size statements, comparative analysis (i.e., change of percentage analysis), and the ratio analyses for both companies.
Comparisons of companies and all other analysis (observations and/or interpretations). (You may combine b and c if you wish, as long as both are well covered.)
Conclusions and recommendation for investment.
References. List all major reference sources.
Appendices. Include tables and graphs of your numerical analyses. For reference convenience, assign a title to each separate item, such as Table 1, Exhibit 1, etc.
B. Typesetting requirements:
Use size 12 font. Times New Roman is preferred.
Double space between lines.
Number pages in accordance with the APA style guide.
One inch on all sides.
Do not right justify text. Use left justify.
Minimum length: 8 pages. (Note: You can easily meet the minimum length requirement since you will have a lot of tables in the paper.)
The submitted work should be in ONE file with a word or pdf format. An Excel spreadsheet file is NOT acceptable.
Plagiarism
Plagiarism will not be tolerated. Evidence of plagiarism will result in a grade of âFâ to the course and be subject to appropriate disciplines.
NOTES:
A portion of your grade will be assessed based on the overall report quality, clarity, format, and cohesiveness.
A FREE RIDER in the group will not be tolerated. However, to report an alleged free rider, you should send me a formal written complaint. You should carefully manage your group over the semester to ensure that no teammate will take the chance of turning into a free rider. Try to contact/manage your teammates frequently and inform me if any member is not willing to participate the group work so we can address this issue ASAP. A free rider will receive his/her group project grades solely based on what he/she has contributed to the projects. If there is a free-rider in your group or a member drops the class, the rest of the group members are still expected to submit a COMPLETE paper.
Again, the balance sheet and income statements are provided at the end. Please use them to prepare common-size and comparative financial statements.
Table 1. Williams-Sonoma, Inc ----Balance Sheet
Williams-Sonoma, Inc. | ||||
BALANCE SHEET | ||||
Fiscal Years 2016, 2015, 2014, 2013 | ||||
(In thousands) | FY 2016 | FY 2015 | FY 2014 | FY 2013 |
ASSETS | ||||
Current assets | ||||
Cash and cash equivalents | $ 213,713 | $ 193,647 | $ 222,927 | 330121 |
Restricted cash | â | â | â | 14289 |
Accounts receivable, net | 88,803 | 79,304 | 67,465 | 60,330 |
Merchandise inventories, net | 977,505 | 978,138 | 887,701 | 813,160 |
Prepaid catalog expenses | 23,625 | 28,919 | 33,942 | 33,556 |
Prepaid expenses | 52,882 | 44,654 | 36,265 | 35,309 |
Deferred income taxes, net | â | â | 130,618 | 121,486 |
Other assets | 10,652 | 11,438 | 13,005 | 10,852 |
Total current assets | 1,367,180 | 1,336,100 | 1,391,923 | 1,419,103 |
Property and equipment, net | 923,283 | 886,813 | 883,012 | 849,293 |
Deferred income taxes, net | 135,238 | 141,784 | 4,265 | 13,824 |
Other assets, net | 51,178 | 52,730 | 51,077 | 54,514 |
Total assets | $ 2,476,879 | $ 2,417,427 | $ 2,330,277 | 2,336,734 |
LIABILITIES AND STOCKHOLDERSâ EQUITY | ||||
Current liabilities | ||||
Accounts payable | $ 453,710 | $ 447,412 | $ 397,037 | 404791 |
Accrued salaries, benefits and other liabilities | 130,187 | 127,122 | 136,012 | 138,181 |
Customer deposits | 294,276 | 296,827 | 261,679 | 228,193 |
Income taxes payable | 23,245 | 67,052 | 32,488 | 49,365 |
Current portion of long-term debt | â | â | 1,968 | 1,785 |
Other liabilities | 59,838 | 58,014 | 46,764 | 38,781 |
Total current liabilities | 961,256 | 996,427 | 875,948 | 861,096 |
Deferred rent and lease incentives | 196,188 | 173,061 | 166,925 | 157,856 |
Long-term debt | 1,968 | |||
Other long-term obligations | 71,215 | 49,713 | 62,698 | 59,812 |
Total liabilities | 1,228,659 | 1,219,201 | 1,105,571 | 1,080,732 |
Stockholdersâ equity | ||||
Preferred stock: $.01 par value; 7,500 shares authorized; none issued | â | â | â | 0 |
Common stock: $.01 par value; 253,125 shares authorized; | ||||
87,325 and 89,563 shares issued and outstanding at | 873 | 896 | 919 | 941 |
January 29, 2017 and January 31, 2016, respectively | ||||
Additional paid-in capital | 556,928 | 541,307 | 527,261 | 522,595 |
Retained earnings | 701,702 | 668,545 | 701,214 | 729,043 |
Accumulated other comprehensive loss | (9,903) | (10,616) | (2,548) | 6524 |
Treasury stock â at cost: 20 and 29 shares as of January 29, 2017 and January 31, 2016, respectively | (1,380) | (1,906) | (2,140) | (3,101) |
Total stockholdersâ equity | 1,248,220 | 1,198,226 | 1,224,706 | 1,256,002 |
Total liabilities and stockholdersâ equity | $ 2,476,879 | $ 2,417,427 | $ 2,330,277 | 2,336,734 |
Table 2. Williams-Sonoma, Inc --- Statement of Income
Williams-Sonoma, Inc. | ||||
STATEMENT OF INCOME | ||||
Fiscal Years 2016, 2015, 2014,2013 | ||||
(In thousands) | FY 2016 | FY 2015 | FY 2014 | FY 2013 |
E-commerce net revenues | $ 2,633,602 | $ 2,522,580 | $ 2,370,694 | $ 2,115,022 |
Retail net revenues | 2,450,210 | 2,453,510 | 2,328,025 | 2,272,867 |
Net revenues | 5,083,812 | 4,976,090 | 4,698,719 | 4,387,889 |
Cost of goods sold | 3,200,502 | 3,131,876 | 2,898,215 | 2,683,673 |
Gross profit | 1,883,310 | 1,844,214 | 1,800,504 | 1,704,216 |
Selling, general and administrative expenses | 1,410,711 | 1,355,580 | 1,298,239 | 1,252,118 |
Operating income | 472,599 | 488,634 | 502,265 | 452,098 |
Interest (income) expense, net | 688 | 627 | 62 | (584) |
Earnings before income taxes | 471,911 | 488,007 | 502,203 | 452,682 |
Income taxes | 166,524 | 177,939 | 193,349 | 173,780 |
Net earnings | $ 305,387 | $ 310,068 | $ 308,854 | $ 278,902 |