250 Chapter Six KEYSTONE COMPUTERS & NETWORKS, INC. Balance Sheet December 31, 20X4 Assets Current Assets Cash Trade receivables, less allowance for doubtful accounts of $96,000 Accounts receivable-officers Inventory Prepaid expenses Total current assets Equipment and leasehold Improvements, at cost Equipment and furniture Leasehold improvements $ 53,964 8,438,524 57,643 1,234,589 156,900 $9.941,620 Less accumulated depreciation $1,090,634 98.900 $ 1.189,534 (250,987) $ 938,547 $1,000,000 $11,880,167 Intangible assets net of amortization $6,612.550 1,349,839 43,200 178,900 $ 8,184,489 Liabilities and Stockholders' Equity Current Liabilities Line of credit Accounts payable Current maturities of capital lease obligations Accrued expenses Total current liabilities Capital lease obligations, less current maturities Total liabilities Stockholders' equity Common stock, $1 par value: 1,000,000 shares authorized 200,000 shares issued and outstanding Additional paid-in capital Retained earnings $ 456,700 $ 8,641189 $ 200,000 423,500 2.615.478 $11,880,167 Audit Planning Understanding the Client Assessing Risks and Responding 251 $96,459,566 74.122,435 $ 22,337,131 KEYSTONE COMPUTERS & NETWORKS, INC. Statements of income and Retained Earnings Year Ended December 31, 20X4 Net sales Cost of goods sold Gross profit Selling expenses: Salaries $ 3,167.889 Payroll benefits and taxes 913,456 Advertising and promotion 1,200.786 Travel and entertainment 609.788 Miscellaneous 334,890 $ 6,226,809 Operating and administration expenses! Operating salaries $4,878,900 Administrative salaries 4.234.234 Payroll benefits and taxes 1,812,344 Rent 797,800 Utilities 210.495 Insurance 356,890 Legal and accounting 457,577 Bad debt 234,500 Supplies 556.345 Depreciation and amortization 334,565 Software development 289,100 Miscellaneous 234,556 $ 14,397,306 Total selling, operating, and administrative expenses Operating income Interest expense Income before income taxes Income taxes Current $ 256765 Deferred 45,632 $ 20,624,115 $ 1,713,016 421,344 $ 1291,672 Net Income Retained earnings, January 1, 20X4 Retained earnings. December 31, 20X4 302,397 $ 989.275 $ 1626,203 $ 2,615,478 Audit Case Review: Task 1 Worksheet Instructions (Problem 6C-4) For the first task of the Audit Case Review, you will recalculate the analytical review ratios for the Keystone Computers & Networks. The working paper on page 254 shows the ratios prepared by the auditors. Use this working paper as a reference to perform the following procedures: Use the worksheet on page 2 to recalculate the ratios for 12/31/X5. Refer to the financial statements on pages 250-251 to calculate the ratios. Show your work on the worksheet and insert the results below: a. 254 Chapter Six WL KEYSTONE COMPUTERS & NETWORKS, INC. Analytical Review Ratios For the Period Ended December 31, 20x5 Prepared by Reviewed by Ending 1231/05 Ending 12/31/X4 Industry Ratio 1.1 37.0 1.2 33.2 1.3 37.0 Current ratio Days' sales in accounts receivable, computed with average accounts receivable Allowance for doubtful accounts/accounts receivable Bad debt expenseet sales Total liabilitieset worth Return on total assets Return on net worth Return on net sales Gross profitet sales Selling, operating, and administrative expenseet sales Times interest earned 1.0% 0.3% 3.5 1.7% 7.5% 0.2% 22.1% 21.2% 1.7 1.1% 0.2% 2.7 8.3% 30.5% 1.0% 23.2% 21.4% 4.1 2.9 9.0% 29.0% 2.3% 24.0% 23.9% 5.5 KEYSTONE COMPUTERS & NETWORKS, INC. Audit Case Review: Task 1 Worksheet Case 6C-4 Details of Computations of 20x5 ratios Current Assets / Current Liabilities Current Ratio Sales per day =Sales/365 Days Sales in A/R Computed with Average A/R Average AR = (Beg. A/R +End A/R)/2 Days sales = Average A/R / Sales per day Allowance for Bad Debts/A/R Bad Debts Expense / Net Sales Inventory Tumover Computed with Average Inventory Average Inv. (Beg. Inv. + End Inv)/2 Inv. Tumover =Cost of Goods Sold / Average Inv. Days Inventory Computed with Average Inventory CGS per day = Cost of Goods Sold/365 Days Inv. = Average Inv. /CGS per day C 18 Total Liabilities to Net Worth Total Liabilities Stockholders' Equity Return on Total Assets Net Income Total Assets Return on Net Worth Net Income / Stockholders' Equity Return on Net Sales Net Income /Net Sales Gross Profit/Net Sales Gross Profit Net Sales Selling, Operating and Admin. Exp. Net Sales Selling, Operating and Admin Expense / Net Sales Times Interest Earned Operating Income / Interest Expense 18 250 Chapter Six KEYSTONE COMPUTERS & NETWORKS, INC. Balance Sheet December 31, 20X4 Assets Current Assets Cash Trade receivables, less allowance for doubtful accounts of $96,000 Accounts receivable-officers Inventory Prepaid expenses Total current assets Equipment and leasehold Improvements, at cost Equipment and furniture Leasehold improvements $ 53,964 8,438,524 57,643 1,234,589 156,900 $9.941,620 Less accumulated depreciation $1,090,634 98.900 $ 1.189,534 (250,987) $ 938,547 $1,000,000 $11,880,167 Intangible assets net of amortization $6,612.550 1,349,839 43,200 178,900 $ 8,184,489 Liabilities and Stockholders' Equity Current Liabilities Line of credit Accounts payable Current maturities of capital lease obligations Accrued expenses Total current liabilities Capital lease obligations, less current maturities Total liabilities Stockholders' equity Common stock, $1 par value: 1,000,000 shares authorized 200,000 shares issued and outstanding Additional paid-in capital Retained earnings $ 456,700 $ 8,641189 $ 200,000 423,500 2.615.478 $11,880,167 Audit Planning Understanding the Client Assessing Risks and Responding 251 $96,459,566 74.122,435 $ 22,337,131 KEYSTONE COMPUTERS & NETWORKS, INC. Statements of income and Retained Earnings Year Ended December 31, 20X4 Net sales Cost of goods sold Gross profit Selling expenses: Salaries $ 3,167.889 Payroll benefits and taxes 913,456 Advertising and promotion 1,200.786 Travel and entertainment 609.788 Miscellaneous 334,890 $ 6,226,809 Operating and administration expenses! Operating salaries $4,878,900 Administrative salaries 4.234.234 Payroll benefits and taxes 1,812,344 Rent 797,800 Utilities 210.495 Insurance 356,890 Legal and accounting 457,577 Bad debt 234,500 Supplies 556.345 Depreciation and amortization 334,565 Software development 289,100 Miscellaneous 234,556 $ 14,397,306 Total selling, operating, and administrative expenses Operating income Interest expense Income before income taxes Income taxes Current $ 256765 Deferred 45,632 $ 20,624,115 $ 1,713,016 421,344 $ 1291,672 Net Income Retained earnings, January 1, 20X4 Retained earnings. December 31, 20X4 302,397 $ 989.275 $ 1626,203 $ 2,615,478 Audit Case Review: Task 1 Worksheet Instructions (Problem 6C-4) For the first task of the Audit Case Review, you will recalculate the analytical review ratios for the Keystone Computers & Networks. The working paper on page 254 shows the ratios prepared by the auditors. Use this working paper as a reference to perform the following procedures: Use the worksheet on page 2 to recalculate the ratios for 12/31/X5. Refer to the financial statements on pages 250-251 to calculate the ratios. Show your work on the worksheet and insert the results below: a. 254 Chapter Six WL KEYSTONE COMPUTERS & NETWORKS, INC. Analytical Review Ratios For the Period Ended December 31, 20x5 Prepared by Reviewed by Ending 1231/05 Ending 12/31/X4 Industry Ratio 1.1 37.0 1.2 33.2 1.3 37.0 Current ratio Days' sales in accounts receivable, computed with average accounts receivable Allowance for doubtful accounts/accounts receivable Bad debt expenseet sales Total liabilitieset worth Return on total assets Return on net worth Return on net sales Gross profitet sales Selling, operating, and administrative expenseet sales Times interest earned 1.0% 0.3% 3.5 1.7% 7.5% 0.2% 22.1% 21.2% 1.7 1.1% 0.2% 2.7 8.3% 30.5% 1.0% 23.2% 21.4% 4.1 2.9 9.0% 29.0% 2.3% 24.0% 23.9% 5.5 KEYSTONE COMPUTERS & NETWORKS, INC. Audit Case Review: Task 1 Worksheet Case 6C-4 Details of Computations of 20x5 ratios Current Assets / Current Liabilities Current Ratio Sales per day =Sales/365 Days Sales in A/R Computed with Average A/R Average AR = (Beg. A/R +End A/R)/2 Days sales = Average A/R / Sales per day Allowance for Bad Debts/A/R Bad Debts Expense / Net Sales Inventory Tumover Computed with Average Inventory Average Inv. (Beg. Inv. + End Inv)/2 Inv. Tumover =Cost of Goods Sold / Average Inv. Days Inventory Computed with Average Inventory CGS per day = Cost of Goods Sold/365 Days Inv. = Average Inv. /CGS per day C 18 Total Liabilities to Net Worth Total Liabilities Stockholders' Equity Return on Total Assets Net Income Total Assets Return on Net Worth Net Income / Stockholders' Equity Return on Net Sales Net Income /Net Sales Gross Profit/Net Sales Gross Profit Net Sales Selling, Operating and Admin. Exp. Net Sales Selling, Operating and Admin Expense / Net Sales Times Interest Earned Operating Income / Interest Expense 18