You are a fraud investigator who has been hired to detect


Case Study 1

You are a fraud investigator who has been hired to detect financial statement fraud for the Chipmunk Company. You have been provided with the financial statements on the following pages and are now begin- ning your analysis of those financial statements.

CASE STUDY 1



CHIPMUNK COMPANY BALANCE SHEET

DECEMBER 31, 2010 AND 2009

Assets 2010 2009

Current assets

Cash $ 1,320,096 $ 1,089,978

Accounts receivable: net (Notes 2 and 5) 1,646,046 1,285,593

Inventories [Notes 1(a), 3, and 5] 13,524,349 12,356,400

Prepaid expenses 17,720 15,826

Deposits 7,916 5,484

Total current assets $16,516,127 $14,753,281 Property, plant, and equipment [Notes 1(b) and 4] 596,517 612,480

at cost, less accumulated depreciation

Total Assets $17,112,644 $15,365,761

Liabilities

Current liabilities

Notes payable-Bank (Note 5) $5,100,000 $ 4,250,000

Accounts payable 1,750,831 1,403,247

Accrued liabilities 257,800 217,003

Federal income taxes payable 35,284 45,990

Current portion of long-term debt (Note 6) 5,642 5,642 Total current liabilities $ 7,149,557 $ 5,921,882

Long-term liabilities

Long-term debt (Note 6) 409,824 415,466

Total Liabilities $ 7,559,381 $ 6,337,348

Stockholders' Equity

Common stock (Note 7) $10,000 $10,000

Additional paid-in capital 2,500,000 2,500,000 Retained earnings 7,043,263 6,518,413

Total stockholders' equity $ 9,553,263 $ 9,028,413

Total Liabilities and Stockholders' Equity $17,112,644 $15,365,761




CASE STUDY 1

CHIPMUNK COMPANY

STATEMENT OF INCOME AND RETAINED EARNINGS FOR THE YEARS ENDED DECEMBER 31, 2010 AND 2009


2010

2009

Sales

$26,456,647

$22,889,060

Sales returns and allowances

37,557

27,740

Net sales

$26,419,090

$22,861,320

Cost of sales

19,133,299

16,530,114

Gross profit

$7,285,791

$6,331,206

Expenses



Accounting

$ 48,253

$ 46,750

Advertising

28,624

27,947

Depreciation

46,415

46,578

Bad debts

148,252

162,344

Business publications

1,231

872

Cleaning services

15,817

12,809

Fuel

64,161

53,566

Garbage collection

4,870

4,674

Insurance

16,415

16,303

Interest

427,362

364,312

Legal

69,752

29,914

Licensing and certification fees

33,580

27,142

Linen service

3,044

1,939

Medical benefits

4,178

4,624

Miscellaneous

47,739

16,631

Office supplies

26,390

23,289

Payroll benefits

569,110

461,214

Pension expense

40,770

37,263

Postage and courier

8,623

20,962

Property taxes

3,978

27,947

Rent

158,526

120,000

Repairs and maintenance

51,316

26,439

Salaries and wages

4,310,281

3,970,092

Security

96,980

100,098

Telephone

5,707

7,092

Travel and entertainment

21,633

16,303

Utilities

63,329

41,919

Total expenses

$ 6,316,336

$ 5,669,023

Net income before income tax

$ 969,455

$ 662,183

Income tax expense

344,605

239,406

Net Income

$ 624,850

$ 422,777

Retained earnings at beginning of year

6,518,413

6,195,636

Less: Dividends

100,000

100,000

Retained earnings at end of year

$ 7,043,263

$ 6,518,413

Note: Inventories balance on January 1, 2009, was $11,427,937.

Ratio Analysis 12/31/2010

LIQUIDITY RATIOS

12/ 31 /10

12 / 31 /09

CHANGE

PERCENT CHANGE

INDUSTRY AVERAGE

Current ratio

  

  

  

  

  

1.21

(current assets/current liabilities)

Quick ratio


[(current assets - inventory - prepaid

expenses)/current liabilities]

0.35

Sales/Receivables


[net sales/net ending receivables]

23.42

Number of days sales in A/R


[(net ending receivables/(net sales/365)]

15.58

Inventory turnover


(cost of sales/average inventory)

1.29

1. Calculate the 2010 and 2009 liquidity ratios identi- fied using the Ratio Analysis table above. Also cal- culate the change and the percentage change for the ratios and complete the table. (Formulas are given to shorten the time spent on the assignment.)

2. Analyze the Chipmunk Company's ratios for both years and compare the figures with the given indus- try ratios. Based on the ratios identified, where do you think fraud may have occurred?

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