ANALYTICAL PROCE Landon, CPA, is planning the audit of Greene, Inc., a publicly traded company that develops and markets products used in the prevention and treatment of infectious diseases. Greene markets two products and has eight new product candidates in various stages of development. The attached information for the current year is available to the auditor. All credit sales terms are 30 days. REQUIRED: (1) Based on the above information, calculate the following eleven ratios that will be useful in planning the audit. Indicate the ratio being calculated and the numbers used in the calculation. Current ratio. (a) (b) Accounts receivable turnover. (c) Accounts receivable days on hand. (d) Inventory turnover. Inventory days on hand. (f) Profit margin (Return on sales). (g) Return on average total assets. (h) Times interest earned. (i) Debt to equity. (j) Debt to total assets. (k) (2) (3) Asset turnover. Indicate how the auditor should interpret the results of the calculations made and how the auditor would use them in planning the audit. Based on the ratios that you calculated, what accounts might require additional audit work by the auditor? Provide an explanation for your answers. GREENE, INC. LIST OF FINANCIAL ITEMS AND THEIR RELATED BALANCES Average Accounts Receivable Average Inventory Average Total Assets Total Assets Cost of Goods Sold Current Assets Current Liabilities Total Liabilities Interest Expense Income Tax Expense Net Sales Net Income (Loss) FOR CURRENT YEAR $ 5,600,000 6,100,000 110,600,000 115,000,000 19,700,000 50,800,000 19,500,000 72,500,000 2,200,000 1,300,000 25,900,000 900,000 (1) (a) Ratio Current Ratio CALCULATION: Current Ratio - GREENE, INC. ANALYTICAL PROCEDURES CALCULATION OF RATIOS PLANNING THE AUDIT Formula Current Assets/Current Liabilities (c) (b) Accounts Receivable Turnover CALCULATION: Accounts Receivable Turnover Accounts Receivable Days on Hand CALCULATION: Net Sales / Average Accounts Receivable 365/Accounts Receivable Turnover Accounts Receivable Days Sales Uncollected= (d) Inventory Turnover CALCULATION: Inventory Turnover = Cost of Goods Sold / Average Inventory 1215 Result GREENE, INC. ANALYTICAL PROCEDURES-CALCULATION OF RATIOS (CONTINUED) Ratio (0) Debt to Equity Ratio CALCULATION: Debt to Equity Ratio - Debt to Total Assets Ratio CALCULATION: Debt to Total Assets Ratio= PLANNING THE AUDIT Formula Total Liabilities/Total Stockholders' Equity Total Liabilities/Total Assets Net Sales/Total Assets Result (k) Asset Turnover CALCULATION: Asset Turnover = (2) GREENE, INC. INTERPRETATION OF RATIOS CALCULATED AS PART OF ANALYTICAL PROCEDURES PLANNING THE AUDIT Ratio (a) Current ratio (b) Accounts receivable turnover (c) Accounts receivable days on hand (d) Inventory turnover Interpretation of Ratio PART OF ANALY Accounts Affected UDIT GREENE, INC. INTERPRETATION OF RATIOS CALCULATED AS PART OF ANALYTICAL PROCEDURES Ratio (CONTINUED) PLANNING THE AUDIT Interpretation of Ratio Accounts Affected (e) Inventory days on hand (0) Profit Margin (Return on Sales) (g) Return on Average Total Assets GREENE, INC. INTERPRETATION OF RATIOS CALCULATED AS PART OF ANALYTICAL PROCEDURES (CONTINUED) PLANNING THE AUDIT Ratio (h) Times Interest Earned: (1) Debt to Equity 6 Debt to Total Assets - (k) Asset Turnover Interpretation of Ratio Accounts Affected (3) EVALUATION OF ACCOUNTS THAT MAY NEED ADDITIONAL AUDIT GREENE, INC. WORK BASED ON ANALYTICAL PROCEDURES PERFORMED Account Needing Additional Work Ratio Indicating Additional Work Needed