$ alo2fe06h ch06.01 Question 1 of 5 Check My Work See the "The Leslie Fay Companies" case for this question. Prepare common-sized financial statements for Leslie Fay for the period 1987-1991. For that same period, compute for Leslie Fay the ratios shown in Exhibit 2. Given these data, which financial statement items do you believe should have been of particular interest to BDO Seidman during that firm's 1991 audit of Leslie Fay? Explain. The Leslie Fay Companies Consolidated Balance Sheets 1987-1991 (in millions) 1991 1990 1989 1988 1987 ASSETS Current Assets: Cash Receivables (net) Inventories Prepaid Expenses & Other Current Assets Total Current Assets $ 4.7 118.9 126.8 $ 4.7 139.5 147.9 $ 5.5 117.3 121.1 5 5.5 109.9 107.0 $ 4.1 82.9 83.0 19.7 270.1 22.5 314.6 19.5 263.4 16.4 238.8 15.9 185.9 Property, Plant, and Equipment Goodwill Deferred Charges and Other Assets Total Assets 39.2 81.3 5.2 $395.8 30.0 88.1 6.2 $438.9 27.2 91.2 5.5 $387.3 25.9 94.1 4.2 $363.0 24.1 90.3 5.1 $305.4 35.0 23.0 48.0 3 29.0 LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Notes Payable Current Maturities of Long-term Debt Accounts Payable Accrued Interest Payable Accrued Compensation Accrued Expenses & Other Income Taxes Payable Total Current Liabilities 45.6 43.3 3.8 31.9 3.0 16.9 4.3 1.4 92.8 38.6 4.1 19.5 3.9 16.6 7.2 15.5 1.4 31.6 3.7 10.6 7.4 14.9 6.4 2.3 119.0 5.8 4.6 6.1 95.9 108.7 72.0 84.4 129.7 129.0 116.3 116.6 Long-term Debt Deferred Credits & Other Noncurrent Liabilities 2.8 2.6 2.7 4.2 4.9 Stockholders' Equity: Common Stock Capital in Excess of Par Value Retained Earnings Other Treasury Stock Total Stockholders' Equity Total Liabilities and Stockholders' Equity 20.0 82.2 156.9 (34.3) 19.0) 215.8 20.0 82.2 127.6 (31.5) (10.7) 187.6 20.0 82.1 98.5 (31.9) (9.0) 159.7 20.0 82.2 72.8 (32.0) (9.1) 133.8 20.0 82.2 50.5 (31.7) 19.1) 111.9 $395.8 $438. $382.3 $363.0 $305.4 View Enlarged Image Exhibit 2 The Leslie Fay Companies, 1991 Industry Norms for Key Financial Ratios Liquidity: Current Ratio Quick Ratio Solvency: Debt to Assets Times Interest Earned Long-term Debt to Equity 4.2 -14 6.7 53.7 days 8.0 45.5 days 3.1 Activity: Inventory Turnover Age of Inventory Accounts Receivable Turnover Age of Accounts Receivable Total Asset Turnover Profitability: Gross Margin Profit Margin on Sales Return on Total Assets Return on Equity 31.5% 2.2% 6.0% 14.0%