based on the veritcal and horizontal analysis of income statement ONLY, what are possobilities or fraud or any illegal actions.

ABC Healthcare Equipment Company Unaudited Financial Statements (000's Omitted) Income Statement Horizontal Analysis Year Ended July 31, 2007 July 31, 2008 Gross Sales $50,000 $75,000 Sales Returns & Allowances $200 $210 Net Sales $49,800 $74,790 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 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 Net Income Before Taxes Income Taxes Net Income After Taxes Earnings Per Share Change Dollars Percent $25,000 50.00 $10 5.00 $24,990 50.18 $10,750 $12,500 $8,750 $14,500 $10,490 134.38 50.00 46.67 101.75 29.51 $3,500 $4,250 $180 $13 $2,500 $1,200 $800 $825 $13,268 $(500) $1,850 $(20) $$(500) $200 $200 $(165) $1,065 (12.50) 77.08 (10.00) (16.67) 20.00 33.33 (16.67) 8.73 $23,347 $7,938 $15,409 $32,772 $11,142 $21,630 $9,425 $3,205 $6,221 40.37 40.37 40.37 $154.09 $216.30 $62 40.37 ABC Healthcare Equipment Company Unaudited Financial Statements (000's Omitted) Income Statement Vertical Analysis Year Ended July 31, 2007 July 31, 2008 July 31, 2009 Gross Sales $50,000 $75,000 $147,000 Sales Returns & Allowances $200 $210 $230 Net Sales $49,800 $74,790 $146,770 Percent of Total Net Sales 2007 2008 2009 100.40% 100.28% 100.16% 0.40% 0.28% 0.16% 100.00% 100.00% 100.00% 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 16.06% 50.20% 37.65% 28.61% 25.07% 50.14% 36.77% 38.44% 18.74% 50.08% 18.17% 50.64% 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 8.03% 4.82% 0.40% 0.03% 6.02% 2.01% 1.20% 1.99% 24.50% 4.68% 5.68% 0.24% 0.02% 3.34% 1.60% 1.07% 1.10% 17.74% 2.01% 2.38% 0.11% 0.01% 1.87% 0.72% 0.75% 0.93% 8.78% 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 46.88% 15.94% 30.94% 43.82% 14.90% 28.92% 40.58% 13.80% 26.78% Earnings Per Share $154.09 $216.30 $393.11 0.31% 0.29% 0.27% ABC Healthcare Equipment Company Unaudited Financial Statements (000's Omitted) Balance Sheet Cash Trade Receivables Inventories Other Total Current Assets Fixed Assets Accumulated Depreciation Net Fixed Assets Total Assets Year Ended July 31, 2007 July 31, 2008 July 31, 2009 $20,030 $1,086 $954 $25,000 $57,803 $98,108 $18,750 $27,500 $26,675 $43 $62 $84 $63,823 $86,451 $125,821 $5,000 $2,300 $2,700 $66,523 $5,000 $2,480 $2,520 $88,971 $5,000 $2,640 $2,360 $128,181 $1,563 $1,017 $2,580 $2,292 $1,106 $3,398 $2,223 $1,074 $3,297 Long Term Debt Total Liabilities $30,053 $32,633 $30,053 $33,451 $30,053 $33,350 Common Stock Paid In Capital Retained Earnings $100 $20,000 $13,790 $100 $20,000 $35,420 $100 $20,000 $74,731 Total Liabilities & Equity $66,523 $88,971 $128,181 Accounts Payable Accrued Expenses Total Current Liabilities Answer Based on the horizontal analysis and vertical analysis on the balance sheet, determine if there is any possibility of fraud or any illegal acts. Horizontal analysis; when a comparative study of many years financial statements of any business concern are analyzed then it is known as horizontal analysis .In this analysis the data are presented in the absolute manner by calculating percentage or ratios or by preparing common size statements. For calculating the % firstly difference is taken. Horizontal analysis which determines the possibility of fraud:Gross sales have been increasing from 50,000 to75,000 in 2008which is nearly 50% increase but with the increase in cost of goods sold have been increased by 102% . Increase in sales by 96% results in increase in cost of goods sold by 158.52%. This increase is unusual which shows that management is engaged in fraudulent activities because the revenues are understated by some reason. It may also be possible that the cost of production is rising which may pressure management to improve the financial position of the business by engaging in fraudulent activities. This indicates that management was engaged in fraudulent activities to present the good financial position of the ABC health care company. Inventories also declined in 2009 by 3% which is clear from the cost of goods sold from the previous year which shows that almost the entire inventory has been sold out but the company is not able to collect all the cash from the sale of the inventory which is shown by the decline in the cash. In spite of decrease in advertising and contract labour sales have been increased which has been arbitrary increased to show before the investors and lenders that their business is growing. It shows that the management is engaged in some fraudulent activities which is clearly shown by the deteorating cash collection position of the company.Net Income after taxes has increased from 40% to 82%. This increase in net income is due to the fact that the sales have been increased and selling expenses have been decreased slightly in relation to increase in sales. Increase in earnings also increases the earning per share which was nearly 82% to presents the good financial position of the business but this is an indication of fraudulent activities that if the cash is declining how the earnings per share is increasing. Earnings per share have been increased by the fraudulent activities to present the good financial position of the company to the investors and lenders. Vertical analysis ; The study which is based on ratios or percentages of the data of a certain period normally one year of all the items of the financial accounts is known as vertical analysis .Under this method the comparison of different items of a year are compared with the selected base of the items of the financial statements. Vertical analysis which determines the possibility of fraud:- According to Vertical analysis the documents related to sales should be checked to find out if the management is engaged in some fraudulent activities or not because management is showing increase in sales and increase in cost of goods sold which is nearly 29 % in 2007 which further rose to 38.44 % in 2008 and 50.6% in 2009 Although gross margin has increased due to the fact that the sales have been increased .Similarly decline in the selling expenses in spite of the fact that the sales have been increased in 2008 and 2009. This decline in the sales expenses was again a issue of consideration because due to increase in the volume of sales selling expenses have to be increased but in both years the selling expenses have declined. Close examination of these expenses may possibly find out the fraudulent activity of showing the fictitious sales, since there was not a corresponding increase in the selling expenses and this fact is very much clear from the declining position of the cash .cash have been decreasing continuously in spite of the fact that the sales have been increasing and selling and distribution expenses have been declining continuously. This shows that it may be possible that the management may engage in some fraudulent activities to present the good financial position of the company to the investors and lenders