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 beginning your analysis of those financial statements. Questions 1. Calculate the 2016 and 2015 liquidity ratios identified using the ratio analysis table below. Also calculate 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 industry ratios. Based on the ratios identified, where do you think fraud may have occurred? Case Study 1. Assets CHIPMUNK COMPANY BALANCE SHEET DECEMBER 31, 2016 AND 2015 2016 2015 Current assets Cash Accounts receivable: net (Notes 2 and 5) Inventories [Notes 1(a), 3, and 5] $1,320,096 $1,089,978 1,646,046 1,285,593 13,524,349 12,356,400 Prepaid expenses Deposits 17,720 15,826 7,916 5,484 Total current assets $16,516,127 $14,753,281 Property, plant, and equipment [Notes 1(b) and 4] at cost, less accumulated depreciation 596,517 612,480 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 $7,559,381 $6,337,348 Total Liabilities Stockholders' Equity Common stock (Note 7) Additional paid-in capital $10,000 $10,000 2,500,000 2,500,000 Retained earnings Total stockholders' equity Total Liabilities and Stockholders' Equity Case Study 1. 7,043,263 6,518,413 $9,553,263 $9,028,413 $17,112,644 $15,365,761 CHIPMUNK COMPANY STATEMENT OF INCOME AND RETAINED EARNINGS FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015 Sales Sales returns and allowances Net sales Cost of sales Gross profit Expenses 2016 2015 $26,456,647 $22,889,060 37,557 27,740 $26,419,090 $22,861,320 19,133,299 16,530,114 $7,285,791 $6,331,206 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 Telephone Travel and entertainment Utilities Total expenses Net income before income tax 96,980 100,098 5,707 7,092 21,633 16,303 63,329 41,919 $6,316,336 $5,669,023 $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