6. Based on the analysis prepared of vertical and horizontal analysis , what relationships might require further investigation? a. Why? b. What further steps might you employ to determine if the relationships identified above are a result of fraud?

ABC Healthcare Equipment Company Unaudited Financial Statements (000's Omitted) Income Statement Gross Sales Sales Returns & Allowances Net Sales Year Ended July 31, 2007 July 31, 2008 July 31, 2009 $50,000 $75,000 $147,000 $200 $210 $230 $49,800 $74,790 $146,770 Beginning Inventory Purchases Ending Inventory Cost of Goods Sold Gross Margin $8,000 $25,000 $18,750 $14,250 $35,550 $18,750 $37,500 $27,500 $28,750 $46,040 $27,500 $73,500 $26,675 $74,325 $72,445 G & A Expenses Advertising Contract Labor Depreciation Equipment Rental Labor Legal & Accounting Other Sales Taxes Total G & A Expenses $4,000 $2,400 $200 $13 $3,000 $1,000 $600 $990 $12,203 $3,500 $4,250 $180 $13 $2,500 $1,200 $800 $825 $13,268 $2,950 $3,500 $160 $13 $2,750 $1,050 $1,098 $1,361 $12,882 Net Income Before Taxes Income Taxes Net Income After Taxes $23,347 $7,938 $15,409 $32,772 $11,142 $21,630 $59,563 $20,251 $39,312 Earnings Per Share $154.09 $216.30 $393.11 ABC Healthcare Equipment Company Unaudited Financial Statements (000's Omitted) Balance Sheet Horizantal Analysis Cash Trade Receivables Inventories Other Total Current Assets Fixed Assets Accumulated Depreciation Net Fixed Assets Total Assets July 31, 2007 $20,030 $25,000 $18,750 $43 $63,823 Year Ended July 31, 2008 July 31, 2009 $1,086 $954 $57,803 $98,108 $27,500 $26,675 $62 $84 $86,451 $125,821 2007 % change $(0.95) $1.31 $0.47 $0.44 $0.35 2008 % change $(0.12) $0.70 $(0.03) $0.35 $0.46 $5,000 $2,300 $2,700 $66,523 $5,000 $2,480 $2,520 $88,971 $5,000 $2,640 $2,360 $128,181 $$0.08 $(0.07) $0.34 0 $0.06 $(0.06) $0.44 $1,563 $1,017 $2,580 $2,292 $1,106 $3,398 $2,223 $1,074 $3,297 $0.47 $0.09 $0.32 $(0.03) $(0.03) $(0.03) Long Term Debt Total Liabilities $30,053 $32,633 $30,053 $33,451 $30,053 $33,350 $$0.03 0 $(0.00) Common Stock Paid In Capital Retained Earnings $100 $20,000 $13,790 $100 $20,000 $35,420 $100 $20,000 $74,731 $$$1.57 0 0 $1.11 Total Liabilities & Equity $66,523 $88,971 $128,181 $0.34 $0.44 Accounts Payable Accrued Expenses Total Current Liabilities Vertical analysis 2007 Cash Trade Receivables Inventories Other Total Current Assets Fixed Assets Accumulated Depreciation Net Fixed Assets 2008 2009 0.301098868 0.012206225 0.007442601 0.3758098703 0.649683605 0.765386446 0.281857403 0.3090894786 0.208104165 0.000646393 0.000696856 0.0006553233 0.959412534 0.971676164 0.981588535 0.075161974 0.056198087 0.0390073412 0.034574508 0.027874251 0.020595876 0.040587466 0.0283238359 0.018411465 Accounts Payable Accrued Expenses Total Current Liabilities 0.0234956331 0.025761203 0.0173426639 0.015287946 0.012431017 0.008378777 0.038783579 0.0381922199 0.025721441 Long Term Debt Total Liabilities 0.451768561 0.337784222 0.234457525 0.4905521399 0.375976442 0.260178966 Common Stock Paid In Capital Retained Earnings 0.0015032395 0.001123962 0.000780147 0.300647896 0.224792348 0.156029365 0.207296724 0.398107248 0.583011523 Total Liabilities & Equity 1 1 1