EARTHWEAR CLOTHIERS Ratio Analyses December 31, 2019 5-1 SAA 1/3/2020 2015 2016 2017 2018 December 31 2019 2019 Expected Actual (unaudited) Difference from Expected Industry DITETENCE Average (from 200L (Audited) (Audited) (Audited) (Audited) 1.64 1.43 1.92 1.80 1.94 2.17 0.23 2.10 0.07 SHORT-TERM LIQUIDITY RATIOS: Current Ratio current assets/ current liabilities Quick Ratio liquid assets/ current liabilities Operating Cash Flow Ratio cash fow from operations / current liabilities 0.39 0.44 0.62 0.53 0.65 0.73 0.08 0.80 -0.07 0.69 0.42 0.81 0.34 0.40 0.40 0.00 N/A N/A 71.18 77.25 74.34 73.82 75.41 118.00 42.60 N/A N/A 5.13 4.73 4.91 4.94 4.84 3.09 -1.74 14.10 -11.01 ACTIVITY RATIOS: Receivables Turnover net sales / net ending receivables Days Outstanding in Accounts Receivable 365 days / receivables tumover Inventory Turnover cost of sales / inventory Days of Inventory on Hand 365 / (cost of sales/inventory) 3.43 4.27 4.48 4.47 4.99 3.87 -1.12 6.20 -2.33 106.41 85.51 81.40 81.72 69.22 94.99 25.78 58.70 36.29 44 95% 44.91% 44.89% 42.51% 42.49% 43.90% 1.41% 38.80% 5.10% 2.34% 3.61% 3.64% 2.37% 3.02% 4.26% 1.24% 3.30% 0.96% PROFITABILITY / PERFORMANCE RATIOS: Gross Profit Percentage gross proft / net sales Profit Margin net income / net sales Return on Assets net income / total assets Return on Equity net income / total owners equity 14.80% 6.84% 10.53% 6.83% 4.69% 11.17% 6.48% 7.40% 3.77% 26.43% 12.86% 16.22% 11.03% 5.92% 16.70% 10.78% 17.50% -0.80% 0.79 0.88 0.58 0.61 0.51 0.50 -0.01 0.84 -0.34 COVERAGE RATIOS: Debt to Equity total liabilites / shareholders investment Times Interest Earned (net income + interest expense) / interest expense 53.88 26.31 26.41 23.92 10.19 50.57 40.38 NA N/A * Expected values are obtained by using the forecast function in Excel (using the row of data from 2015 and 2018 to obtain the expected value for 2019). | Industry Source: Dun & Bradstreet (D&B). The median values of the industry ratios are used for comparison purposes. For ratos not specifically included on D&B, ratios were calculated from average financial statement data provided. EARTHWEAR CLOTHIERS Identification of Accounts with Unexpected Fluctuations December 31, 2019 1. Establish Threshold for Unexpected Fluctuations To begin identifying accounts with unexpected fuctuations auditors must establish a threshold for account difference. All accounts whose actual 2019 unaudited account balance differs from the expected balance by a value greater than the threshold established will be shown in the charts below. As a general rule the threshold should not exceed materiality. For the purposes of this exercise we assume planning materiality is $3.1 million. Enter this value in the field below as 3100. A. Set threshold for account difference in thousands (e.9., 3100) Enter threshold here. Please enter number thousands 2. Evaluate Unexpected Fluctuations Lists of Balance Sheet and Income Statement accounts have been generated below based on your threshold for account difference. In the "Evaluation" column please identify 2 or more balance sheet and 2 or more income statement accounts where you believe the difference presents increased risk of material misstatement that may require a change in the nature, timing or extent of planned audit procedures. Please indicate possible reasons for the difference, potential risks, and suggested audit plan revisions. A. Balance Sheet Accounts Account Difference from Expectations Evaluation B. Income Statement Accounts Account Difference from Expectations Evaluation EARTHWEAR CLOTHIERS Ratio Analyses December 31, 2019 5-1 SAA 1/3/2020 2015 2016 2017 2018 December 31 2019 2019 Expected Actual (unaudited) Difference from Expected Industry DITETENCE Average (from 200L (Audited) (Audited) (Audited) (Audited) 1.64 1.43 1.92 1.80 1.94 2.17 0.23 2.10 0.07 SHORT-TERM LIQUIDITY RATIOS: Current Ratio current assets/ current liabilities Quick Ratio liquid assets/ current liabilities Operating Cash Flow Ratio cash fow from operations / current liabilities 0.39 0.44 0.62 0.53 0.65 0.73 0.08 0.80 -0.07 0.69 0.42 0.81 0.34 0.40 0.40 0.00 N/A N/A 71.18 77.25 74.34 73.82 75.41 118.00 42.60 N/A N/A 5.13 4.73 4.91 4.94 4.84 3.09 -1.74 14.10 -11.01 ACTIVITY RATIOS: Receivables Turnover net sales / net ending receivables Days Outstanding in Accounts Receivable 365 days / receivables tumover Inventory Turnover cost of sales / inventory Days of Inventory on Hand 365 / (cost of sales/inventory) 3.43 4.27 4.48 4.47 4.99 3.87 -1.12 6.20 -2.33 106.41 85.51 81.40 81.72 69.22 94.99 25.78 58.70 36.29 44 95% 44.91% 44.89% 42.51% 42.49% 43.90% 1.41% 38.80% 5.10% 2.34% 3.61% 3.64% 2.37% 3.02% 4.26% 1.24% 3.30% 0.96% PROFITABILITY / PERFORMANCE RATIOS: Gross Profit Percentage gross proft / net sales Profit Margin net income / net sales Return on Assets net income / total assets Return on Equity net income / total owners equity 14.80% 6.84% 10.53% 6.83% 4.69% 11.17% 6.48% 7.40% 3.77% 26.43% 12.86% 16.22% 11.03% 5.92% 16.70% 10.78% 17.50% -0.80% 0.79 0.88 0.58 0.61 0.51 0.50 -0.01 0.84 -0.34 COVERAGE RATIOS: Debt to Equity total liabilites / shareholders investment Times Interest Earned (net income + interest expense) / interest expense 53.88 26.31 26.41 23.92 10.19 50.57 40.38 NA N/A * Expected values are obtained by using the forecast function in Excel (using the row of data from 2015 and 2018 to obtain the expected value for 2019). | Industry Source: Dun & Bradstreet (D&B). The median values of the industry ratios are used for comparison purposes. For ratos not specifically included on D&B, ratios were calculated from average financial statement data provided. EARTHWEAR CLOTHIERS Identification of Accounts with Unexpected Fluctuations December 31, 2019 1. Establish Threshold for Unexpected Fluctuations To begin identifying accounts with unexpected fuctuations auditors must establish a threshold for account difference. All accounts whose actual 2019 unaudited account balance differs from the expected balance by a value greater than the threshold established will be shown in the charts below. As a general rule the threshold should not exceed materiality. For the purposes of this exercise we assume planning materiality is $3.1 million. Enter this value in the field below as 3100. A. Set threshold for account difference in thousands (e.9., 3100) Enter threshold here. Please enter number thousands 2. Evaluate Unexpected Fluctuations Lists of Balance Sheet and Income Statement accounts have been generated below based on your threshold for account difference. In the "Evaluation" column please identify 2 or more balance sheet and 2 or more income statement accounts where you believe the difference presents increased risk of material misstatement that may require a change in the nature, timing or extent of planned audit procedures. Please indicate possible reasons for the difference, potential risks, and suggested audit plan revisions. A. Balance Sheet Accounts Account Difference from Expectations Evaluation B. Income Statement Accounts Account Difference from Expectations Evaluation