EARTHWEAR CLOTHIERS										Table 5-1
Ratio Analyses										SAA
December 31, 2019										1/3/2020
	December 31
	2015	2016	2017	2018	2019	2019	Difference from Expected		Industry
	(Audited)	(Audited)	(Audited)	(Audited)	Expected*	Actual (unaudited)			Average	Difference (from 2019)
SHORT-TERM LIQUIDITY RATIOS:
Current Ratio	1.64	1.43	1.92	1.80	1.94	2.17	0.23		2.10	0.07
current assets / current liabilities
Quick Ratio	0.39	0.44	0.62	0.53	0.65	0.73	0.08		0.80	-0.07
liquid assets / current liabilities
Operating Cash Flow Ratio	0.69	0.42	0.81	0.34	0.40	0.40	0.00		N/A	N/A
cash flow from operations / current liabilities
ACTIVITY RATIOS:
Receivables Turnover	71.18	77.25	74.34	73.82	75.41	118.00	42.60		N/A	N/A
net sales / net ending receivables
Days Outstanding in Accounts Receivable	5.13	4.73	4.91	4.94	4.84	3.09	-1.74		14.10	-11.01
365 days / receivables turnover
Inventory Turnover	3.43	4.27	4.48	4.47	4.99	3.87	-1.12		6.20	-2.33
cost of sales / inventory
Days of Inventory on Hand	106.41	85.51	81.40	81.72	69.22	94.99	25.78		58.70	36.29
365 / (cost of sales / inventory)
PROFITABILITY / PERFORMANCE RATIOS:
Gross Profit Percentage	44.95%	44.91%	44.89%	42.51%	42.49%	43.90%	1.41%		38.80%	5.10%
gross profit / net sales
Profit Margin	2.34%	3.61%	3.64%	2.37%	3.02%	4.26%	1.24%		3.30%	0.96%
net income / net sales
Return on Assets	14.80%	6.84%	10.53%	6.83%	4.69%	11.17%	6.48%		7.40%	3.77%
net income / total assets
Return on Equity	26.43%	12.86%	16.22%	11.03%	5.92%	16.70%	10.78%		17.50%	-0.80%
net income / total owners' equity
COVERAGE RATIOS:
Debt to Equity	0.79	0.88	0.58	0.61	0.51	0.50	-0.01		0.84	-0.34
total liabilities / shareholders' investment
Times Interest Earned	53.88	26.31	26.41	23.92	10.19	50.57	40.38		N/A	N/A
(net income + interest expense) / interest expense
* 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 ratios not specifically included on D&B, ratios were calculated from average financial statement data provided.
N/A = not available or could not be calculated from financial data.
The McGraw-Hill Companies, Inc., 2019

1. Comments and Summary
Based on your review of work paper 5-1, list one or two ratios in each of the following categories that you believe increase the risk of potential misstatement. Explain why you believe the risk is increased and identify possible causes of a potential misstatement and indicate if you believe the auditor would need to revise his or her typical audit approach to address the risk.
For example, "Days of Inventory on Hand" increased significantly indicating merchandise is held in inventory for a longer period than prior years and it is also held for a longer period than the industry average. This increases the risk of obsolete inventory and/or the market value dropping below recorded cost. The auditor should increase the extent of inventory-valuation testing and/or change the nature of the testing to address the increased risk.
SHORT-TERM LIQUIDITY RATIOS:
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ACTIVITY RATIOS:
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PROFITABILITY / PERFORMANCE RATIOS:
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COVERAGE RATIOS:
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2. Assessment of Financial Position
Based on your review of work paper 5-1, assess the client's ability to continue as a going concern (to stay in business) by responding to the following questions.
A. Identify ratios and trends, if any, that cause concern about the client's ability to continue as a going concern
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B. Identify ratios and trends, if any, that indicate a high likelihood that the client will continue successfully as a going concern
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C. Assess the client's financial condition as one of the following (select one from the drop down list in cell B35)
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D. Briefly explain the reasoning behind your assessment.
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