Accounting Homework
Fraud Detection Using Trend Analysis and Financial Statement Analysis
Read the following independent problems and respond according to the instructions at the end:
1. As the Chief Executive Officer of your company, you've been going over your financial statements and have noticed something disturbing. You perform a horizontal analysis and find that sales have been increasing at a rate of 4 percent per year, while inventory has risen at a rate of 39 percent per year. Address the following:
1. Could fraud be occurring? Why or why not?
2. Assuming that fraud is being committed, how would you investigate?
2. Large-scale fraud can often be detected by performing financial statement analysis. Although such analysis can raise areas of concern, not all red flags are the result of fraudulent activities. Reasonable explanations often exist for anomalies in financial statements.
The statement of cash flows is one financial statement that is analyzed to identify possible fraud. This statement for Roamana Inc. for a three-year period is shown below.
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ROAMANA, INC.
STATEMENT OF CASH FLOWS
FOR THE PERIOD ENDED DECEMBER 31, 20X5
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IN MILLIONS
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20X5
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20X4
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20X3
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Cash from Operations
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Net income
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$ 900
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$ 800
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$ 450
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Change in accounts receivable
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(606)
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(260)
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25
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Change in accounts payable
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150
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45
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90
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Change in inventory
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(50)
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15
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25
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Depreciation
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105
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90
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65
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Net cash from operations
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$ 499
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$ 690
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$ 655
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Cash from Investing
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Additions to property, plant, and equipment
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$ (950)
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$ (690)
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$(790)
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Proceeds from sale of securities
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25
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56
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15
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Net cash from investing
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$ (925)
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$ (634)
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$(775)
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Cash from Financing
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Borrowings of long-term debt
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$ 250
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$ 150
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$ 34
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Cash dividends
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(140)
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(85)
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(45)
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Net cash from financing
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$ 110
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$ 65
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$ (11)
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Increase (decrease) in cash
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$ (316)
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$ 121
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$ (131)
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Address the following:
a. Identify possible red flags.
b. Indicate if reasonable explanations exist for the areas of concern.
c. Identify the "next step" actions that you would take as part of the investigation.
Your paper must be in a Word document of three to five pages. If you wish to include calculations in support of your response, place them in the form of a table within your paper. Cite at least two resources supporting your responses, other than the course textbook. The CSU-Global Library is a good place to find these resources. Format your paper in accordance with CSU-Global Guide to Writing and APA Requirements.