What ratios could verify mark assumptions


Pacific Corporation conducted its operations in San Diego, California. It was a dominant player in the surfboard industry. Pacific was started in the late 1900's, and its customers were remarkably loyal. The mom-and-pop shop was steadily growing in an industry continually saturated by thousands of start ups. The loyalty of its customers helped Pacific maintain higher prices, quality goods, and a good market share in the industry. Mark, the son of the owner Bill, moved home to become the family accountant. His parents' success amazed him, and he wanted to find out exactly what made the company so successful. He decided to run ratios on the following numbers:

                                 2000         1999        1998
Sales                      4,500,000  2,000,000  500,000
COGS                     3,735,000  1,640,000  400,000
Accounts receivable 2,000,000     400,000    95,000
Bad Debt Expense      100,000       80,000    70,000
Inventory                   200,000     100,000    50,000

Upon doing several calculations, Mark decided the company was potential committing fraud, or at least losing money due to customer's non-payment.

A. What ratio's could verify Mark's assumptions?

B. Compute these ratios and explain your answers.

C. If fraud exists, what could his parents do to solve the problem?

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Accounting Basics: What ratios could verify mark assumptions
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