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Chester, Inc. Trial Balances for years ending December 31, 2013, 2014, and 2015 Account Description Cash on Hand Regular Checking Account Savings Account Accounts Receivable Other Receivables Allowance for Doubtful Accounts Inventory Reserve for Inventory Obsolescence Prepaid Insurance Prepaid Rent Office Supplies Land Buildings and Land Improvements Machinery, Equipment, Office Furniture Accum. Depreciation Investments Other Noncurrent Assets Taxes Receivable/payable Accounts Payable Wages Payable FICA Employee Withholding Medicare Withholding Federal Payroll Taxes Payable State Payroll Taxes Payable FICA Employer Withholding Medicare Employer Withholding Line of Credit Current Portion Long-Term Debt Interest payable Bonuses payable Dividend payable Common Stock Paid-in Capital Retained Earnings Dividends Sales Sales Returns Warranty Expense Income from Investments Interest Income 2013 $ 2,484 $ 247,646 3,806,198 20,513,628 (1,578,525) 23,531,507 (3,765,000) 929,143 250,000 9,259 146,250 779,882 541,521 (205,000) 715,864 67,301 (5,791,398) (36,838) (1,648) (730) (7,541) (3,519) (1,648) (730) (12,500,000) (6,000,000) (10,131,250) (9,278,750) (2,773,901) 6,000,000 (307,716,148) 5,621,979 1,375,352 (255,379) 2014 2,548 253,960 4,083,071 57,697,091 1,400,000 (1,387,691) 75,851,471 (12,136,103) 2,830,474 9,565 131,040 698,775 3,280,589 (764,692) 2,238,634 (3,205,440) (22,488,866) (264,513) (9,452) (12,785) (132,256) (61,720) (9,452) (12,785) (49,731,360) (13,440,000) (470,311) (504,000) (15,250,000) (10,131,250) (9,278,750) (2,238,105) 15,250,000 (271,839,067) 12,432,247 1,297,104 (1,227,199) (147,707) Cost of Goods Sold Freight Advertising Expense Auto Expenses Research and Development Depreciation Expense Warehouse Salaries Property Tax Expense Legal and Professional Expense Bad Debt Expense Insurance Expense Maintenance Expense Utilities Phone 176,961,527 5,378,689 1,121,425 261,218 39,015,418 166,250 5,791,730 100,619 4,506,417 2,028,032 1,067,428 76,420 169,554 95,467 161,029,981 4,749,095 1,161,276 235,763 592,335 581,012 5,348,208 111,252 10,435,113 5,875,403 1,045,085 96,220 170,855 58,911 Postal Miscellaneous Office Expense Payroll Tax Exp Pension/Profit-Sharing Plan Ex Rent or Lease Expense Administrative Wages Expense Bonus expense Interest Expense Income Tax Expense - Federal Income Tax Expense - State Loss on Legal Settlement 160,042 21,279 1,938,736 3,750,000 3,254,357 21,094,132 1,093,750 2,956,250 536,250 23,965,000 87,140 27,879 1,767,149 3,696,000 1,351,363 18,344,399 504,000 3,373,056 14,142,240 2,503,200 - Chester Inc Industry Ratios biz stats 3, 2014, and 2015 2015 $ 2,599 243,802 4,205,563 49,042,528 1,200,000 (2,942,552) 65,990,780 (10,558,525) 2,667,722 9,182 131,040 833,775 3,280,589 (1,381,847) 2,070,736 (6,011,540) (13,850,648) (198,384) (7,089) (9,589) (99,192) (46,290) (7,089) (9,589) (44,177,211) (12,084,720) (568,429) (459,000) (15,000,000) (10,131,250) (9,278,750) (9,185,791) 15,000,000 (288,876,206) 23,110,096 1,444,381 (1,138,905) (142,168) dustry Ratios biz stats 179,103,248 4,325,068 1,057,591 214,713 3,080,313 617,155 4,870,689 101,319 9,503,406 13,963,800 951,774 87,629 155,600 53,651 79,360 25,390 1,609,368 3,366,000 2,230,705 19,706,506 459,000 2,842,147 7,269,540 1,258,000 - Chester, Inc. Income Statement For the Year Ending December 31, 2013 2014 2015 Revenues: Sales Freight Sales Returns 307,716,148 5,378,689 5,621,979 271,839,067 4,749,095 12,432,247 288,876,206 4,325,068 23,110,096 Cost of Goods Sold Gross Profit on Sales 176,961,527 119,753,953 161,029,981 93,627,744 179,103,248 82,337,793 1,375,352 1,121,425 39,015,418 1,297,104 1,161,276 592,335 1,444,381 1,057,591 3,080,313 166,250 41,678,445 581,012 3,631,727 617,155 6,199,439 5,791,730 100,619 4,506,417 261,218 2,028,032 1,067,428 76,420 169,554 95,467 160,042 21,279 1,938,736 3,750,000 3,254,357 21,094,132 2,956,250 5,348,208 111,252 10,435,113 235,763 5,875,403 1,045,085 96,220 170,855 58,911 87,140 27,879 1,767,149 3,696,000 1,351,363 18,344,399 504,000 14,142,240 4,870,689 101,319 9,503,406 214,713 13,963,800 951,774 87,629 155,600 53,651 79,360 25,390 1,609,368 3,366,000 2,230,705 19,706,506 459,000 7,269,540 536,250 2,503,200 1,258,000 47,807,933 65,800,180 65,906,451 89,486,377 30,267,575 69,431,908 24,195,836 72,105,890 10,231,903 255,379 147,707 142,168 Operating Expenses: Selling Expenses Warranty Expense Advertising Expense Research and Development Expense Depreciation Expense Administrative Expenses: Warehouse Salaries Property Tax Expense Legal and Professional Expense Auto Expenses Bad Debt Expense Insurance Expense Maintenance Expense Utilities Phone Postal Miscellaneous Office Expense Payroll Tax Exp Pension/Profit-Sharing Plan Ex Rent or Lease Expense Administrative Wages Expense Bonus expense Income Tax Expense - Federal Income Tax Expense - State Total Operating Expenses Operating Income Other Income: Interest Income Income from Investments Other Expenses: Interest Expense Legal Settlement 1,227,199 1,138,905 255,379 - 1,374,906 1,281,073 1,093,750 23,965,000 3,373,056 - 2,842,147 - Net Income 25,058,750 3,373,056 2,842,147 5,464,204 22,197,686 8,670,829 Chester, Inc. Balance Sheet for years ending December 31, 2013 2014 2015 4,056,327 20,513,628 0 (1,578,525) 23,531,507 (3,765,000) 929,143 250,000 9,259 715,864 67,301 44,729,504 4,339,579 57,697,091 1,400,000 (1,387,691) 75,851,471 (12,136,103) 2,830,474 0 9,565 2,238,634 0 130,843,020 4,451,964 49,042,528 1,200,000 (2,942,552) 65,990,780 (10,558,525) 2,667,722 0 9,182 2,070,736 0 111,931,835 146,250 779,882 541,521 (205,000) 131,040 698,775 3,280,589 (764,692) 131,040 833,775 3,280,589 (1,381,847) Assets Current Assets: Cash and Cash Equivalent Accounts Receivable Other Receivables Allowance for Doubtful Accounts Inventory Reserve for Inventory Obsolescence Prepaid Insurance Prepaid Rent Office Supplies Investments Other Noncurrent Assets Total Current Assets Non Current Assets: Land Buildings and Land Improvements Machinery, Equipment, Office Furniture Accum. Depreciation Total Non Current Assets Total Assets 1,262,654 45,992,157 3,345,711 134,188,731 2,863,556 114,795,391 Liabilities And Stockholder's Equity Current Liabilities: Taxes Payable Accounts Payable Wages Payable FICA Employee Withholding Medicare Withholding Federal Payroll Taxes Payable State Payroll Taxes Payable FICA Employer Withholding Medicare Employer Withholding Current Portion Long-Term Debt Interest payable Bonuses payable Dividend payable Total Current Liabilities Long term Liabilities: Line of Credit Total Long Term Liabilities Total Liabilities Stockholder's Equity Common Stock Paid-in Capital 0 5,791,398 36,838 1,648 730 7,541 3,519 1,648 730 0 0 0 6,000,000 11,844,053 3,205,440 22,488,866 264,513 9,452 12,785 132,256 61,720 9,452 12,785 13,440,000 470,311 504,000 15,250,000 55,861,581 6,011,540 13,850,648 198,384 7,089 9,589 99,192 46,290 7,089 9,589 12,084,720 568,429 459,000 15,000,000 48,351,560 12,500,000 12,500,000 49,731,360 49,731,360 44,177,211 44,177,211 24,344,053 105,592,941 92,528,771 10,131,250 9,278,750 10,131,250 9,278,750 10,131,250 9,278,750 Retained Earnings Total Equity Total Liabilities & Stockholder's Equity 2,238,105 9,185,791 2,856,620 21,648,105 45,992,157 28,595,791 134,188,732 22,266,620 114,795,391 Chester, Inc. Statement of Retained Earnings for years ending December 31, 2013 2014 2015 Retained Earnings, Beginning 2,773,901 2,238,105 9,185,791 Add: Net Income 5,464,204 22,197,686 8,670,829 Less: Dividends (6,000,000) (15,250,000) (15,000,000) Retained Earnings Closing 2,238,105 9,185,791 2,856,620 Chester, Inc. Statement of Cash Flows for years ending December 31 Cash flows from operating activities Net Income Adjustments to reconcile net income to Net cash provided by operating activities Depreciation Expense (Increase)/Decrease in Prepaid Expenses (Increase)/decrease in Accounts Receivable (Increase)/decrease in other receivables (Increase)/decrease in Inventory (Increase)/Decrease in Prepaid Rent (Increase)/Decrease in Office Supplies (Decrease)/Increase inTaxes Payable (Decrease)/Increase in Accounts Payable (Decrease)/Increase in Wages Payable (Decrease)/Increase in FICA Employee Withholding (Decrease)/Increase in Medicare Withholding (Decrease)/Increase in Federal Payroll Taxes Payable (Decrease)/Icrease inState Payroll Taxes Payable (Decrease)/Increase in FICA Employer Withholding (Decrease)/Increase in Medicare Employer Withholding (Decrease)/Increase in Bonus Payable (Decrease)/Increase in Interest Payable (Decrease)/Increase in Line of Credit Net Cash used by operating activities Cash flor from investing activities Purchase of Investments Sale/(Purchase) of Land/Building Purchase equipment Net cash used by investing activities Cash flows from financing activities Raising of Long Term debt Payment of cash dividend Net cash provided by financing activities Net Increase (Decrease) in Cash Cash at beginning of year Cash at the end of year Cash as per Balance Sheet Difference Reason for Difference its Mentioned that No investment Sold or Purchased during the Year, But there is increase and decrease in Investment Depreciation Depreciation as per Income Statement Accumulated Depreciation as per trial Balance ester, Inc. for years ending December 31 2014 2015 22,197,686 8,670,829 581,012 (1,901,331) (37,374,297) (1,400,000) (43,948,861) 250,000 (306) 3,205,440 16,697,468 617,155 162,752 10,209,424 200,000 8,283,113 383 2,806,100 (8,638,219) 227,675 7,804 12,055 124,715 58,200 7,804 12,055 504,000 470,311 37,231,360 (66,128) (2,363) (3,196) (33,064) (15,430) (2,363) (3,196) (45,000) 98,118 (5,554,149) (25,234,896) (3,037,210) -1,522,770 163,619 -2,739,067 8,013,936 16,684,766 167,898 -135,000 0 (4,098,218) 13,440,000 -6,000,000 Due to Depreciation 32,898 -1,355,280 -15,250,000 7,440,000 304,572 (16,605,280) 112,384 4,056,328 4,360,900 4,339,579 4,451,963 4,339,579 21,321.00 Due to Round off 4,451,964 (1.59) 581,012 559,692 21,320 Chester, Inc. Ratios for years ending December 31, 2013 2014 Under Armour Industry 2015 Liquidity Current Ratio Quick Ratio 3.78 2.00 2.34 1.15 2.31 1.11 3.13 1.18 3.03 0.46 Solvency Total Debt to Assets Total Debts to Equity Long term Debts to Total assets 0.53 1.12 0.13 0.79 3.69 0.22 0.81 4.16 0.24 0.38 0.31 1.78% 38.92% 11.88% 8.17% 34.44% 16.54% 3.00% 28.50% 7.55% 5.87% 48.10% 10.38% 8.73% 49.89% 13.72% Profitability Net Profit Margin Gross Profit Margin Return on Investment Horizontal Analysis Chester, Inc. Balance Sheet for years ending December 31, 2013 2014 Increase (Decrease) Assets Current Assets: Cash and Cash Equivalent Accounts Receivable Other Receivables Allowance for Doubtful Accounts Inventory Reserve for Inventory Obsolescence Prepaid Insurance Prepaid Rent Office Supplies Investments Other Noncurrent Assets 4,056,327 20,513,628 0 (1,578,525) 23,531,507 (3,765,000) 929,143 250,000 9,259 715,864 67,301 4,339,579 57,697,091 1,400,000 (1,387,691) 75,851,471 (12,136,103) 2,830,474 0 9,565 2,238,634 0 283,252 37,183,463 1,400,000 190,834 52,319,964 (8,371,103) 1,901,331 (250,000) 306 1,522,770 (67,301) Total Current Assets Non Current Assets: 44,729,504 130,843,020 86,113,517 146,250 779,882 541,521 (205,000) 131,040 698,775 3,280,589 (764,692) (15,210) (81,108) 2,739,067 (559,692) 1,262,654 3,345,711 2,083,058 45,992,157 134,188,731 88,196,574 0 5,791,398 36,838 1,648 730 7,541 3,519 1,648 730 0 0 0 6,000,000 11,844,053 3,205,440 22,488,866 264,513 9,452 12,785 132,256 61,720 9,452 12,785 13,440,000 470,311 504,000 15,250,000 55,861,581 3,205,440 16,697,468 227,675 7,804 12,055 124,715 58,200 7,804 12,055 13,440,000 470,311 504,000 9,250,000 44,017,528 12,500,000 12,500,000 24,344,053 49,731,360 49,731,360 105,592,941 37,231,360 37,231,360 81,248,888 10,131,250 9,278,750 2,238,105 10,131,250 9,278,750 9,185,791 0 0 6,947,687 Land Buildings and Land Improvements Machinery, Equipment, Office Furniture Accum. Depreciation Total Non Current Assets Total Assets Liabilities And Stockholder's Equity Current Liabilities: Taxes Payable Accounts Payable Wages Payable FICA Employee Withholding Medicare Withholding Federal Payroll Taxes Payable State Payroll Taxes Payable FICA Employer Withholding Medicare Employer Withholding Current Portion Long-Term Debt Interest payable Bonuses payable Dividend payable Total Current Liabilities Long term Liabilities: Line of Credit Total Long Term Liabilities Total Liabilities Stockholder's Equity Common Stock Paid-in Capital Retained Earnings Total Equity Total Liabilities & Stockholder's Equity 21,648,105 45,992,157 28,595,791 134,188,732 6,947,687 88,196,574 Chester, Inc. Income Statement For the Year Ending December 31, 2013 2014 Increase (Decrease) Revenues: Sales Freight Sales Returns Cost of Goods Sold Gross Profit on Sales 307,716,148 5,378,689 5,621,979 176,961,527 119,753,953 271,839,067 4,749,095 12,432,247 161,029,981 93,627,744 (35,877,081) (629,595) 6,810,268 (15,931,546) (26,126,209) 1,375,352 1,121,425 39,015,418 166,250 41,678,445 1,297,104 1,161,276 592,335 581,012 3,631,727 (78,248) 39,851 (38,423,083) 414,762 (38,046,717) 5,791,730 100,619 4,506,417 261,218 2,028,032 1,067,428 76,420 169,554 95,467 160,042 21,279 1,938,736 3,750,000 3,254,357 21,094,132 2,956,250 536,250 47,807,933 89,486,377 30,267,575 5,348,208 111,252 10,435,113 235,763 5,875,403 1,045,085 96,220 170,855 58,911 87,140 27,879 1,767,149 3,696,000 1,351,363 18,344,399 504,000 14,142,240 2,503,200 65,800,180 69,431,908 24,195,836 (443,522) 10,633 5,928,695 (25,455) 3,847,371 (22,343) 19,800 1,301 (36,556) (72,901) 6,600 (171,587) (54,000) (1,902,994) (2,749,734) 504,000 11,185,990 1,966,950 17,992,247 (20,054,470) (6,071,739) 255,379 255,379 147,707 1,227,199 1,374,906 (107,671) 1,227,199 1,119,528 1,093,750 3,373,056 2,279,306 Operating Expenses: Selling Expenses Warranty Expense Advertising Expense Research and Development Expense Depreciation Expense Administrative Expenses: Warehouse Salaries Property Tax Expense Legal and Professional Expense Auto Expenses Bad Debt Expense Insurance Expense Maintenance Expense Utilities Phone Postal Miscellaneous Office Expense Payroll Tax Exp Pension/Profit-Sharing Plan Ex Rent or Lease Expense Administrative Wages Expense Bonus expense Income Tax Expense - Federal Income Tax Expense - State Total Operating Expenses Operating Income Other Income: Interest Income Income from Investments Other Expenses: Interest Expense Legal Settlement Net Income 23,965,000 25,058,750 5,464,204 3,373,056 22,197,686 (23,965,000) (21,685,694) 16,733,482 . ing December 31, Percentage 6.98% 181.26% 2015 Increase (Decrease) Percentage -12.09% 222.34% 222.34% 204.63% -100.00% 3.31% 212.72% -100.00% 4,451,964 49,042,528 1,200,000 (2,942,552) 65,990,780 (10,558,525) 2,667,722 0 9,182 2,070,736 0 112,385 (8,654,564) (200,000) (1,554,861) (9,860,691) 1,577,578 (162,752) 0 (383) (167,898) 0 2.59% -15.00% -14.29% 112.05% -13.00% -13.00% -5.75% 192.52% 111,931,835 (18,911,185) -14.45% -10.40% -10.40% 505.81% 273.02% 131,040 833,775 3,280,589 (1,381,847) 0 135,000 0 (617,155) 0.00% 19.32% 0.00% 80.71% 164.97% 2,863,556 (482,155) -14.41% 191.76% 114,795,391 (19,393,340) -14.45% 154.17% 371.64% 6,011,540 13,850,648 198,384 7,089 9,589 99,192 46,290 7,089 9,589 12,084,720 568,429 459,000 15,000,000 48,351,560 2,806,100 (8,638,219) (66,128) (2,363) (3,196) (33,064) (15,430) (2,363) (3,196) (1,355,280) 98,118 (45,000) (250,000) (7,510,021) 87.54% -38.41% -25.00% -25.00% -25.00% -25.00% -25.00% -25.00% -25.00% -10.08% 20.86% -8.93% -1.64% -13.44% 297.85% 297.85% 333.75% 44,177,211 44,177,211 92,528,771 (5,554,149) (5,554,149) (13,064,170) -11.17% -11.17% -12.37% 0.00% 0.00% 310.43% 10,131,250 9,278,750 2,856,620 (6,329,171) -68.90% 288.32% 618.04% 473.44% 1651.37% 1653.77% 1653.73% 473.44% 1651.37% -4.00% -7.50% 32.09% 191.76% 22,266,620 114,795,391 (6,329,171) (19,393,341) -22.13% -14.45% . ment ecember 31, Percentage 2015 Increase (Decrease) Percentage -11.66% -11.71% 121.14% -9.00% -21.82% 288,876,206 4,325,068 23,110,096 179,103,248 82,337,793 17,037,138 (424,026) 10,677,849 18,073,266 (11,289,950) 6.27% -8.93% 85.89% 11.22% -12.06% -5.69% 3.55% -98.48% 249.48% -91.29% 1,444,381 1,057,591 3,080,313 617,155 6,199,439 147,277 (103,685) 2,487,978 36,142 2,567,712 11.35% -8.93% 420.03% 6.22% 70.70% -7.66% 10.57% 131.56% -9.74% 189.71% -2.09% 25.91% 0.77% -38.29% -45.55% 31.02% -8.85% -1.44% -58.48% -13.04% 4,870,689 101,319 9,503,406 214,713 13,963,800 951,774 87,629 155,600 53,651 79,360 25,390 1,609,368 3,366,000 2,230,705 19,706,506 459,000 7,269,540 1,258,000 65,906,451 72,105,890 10,231,903 (477,519) (9,933) (931,707) (21,050) 8,088,397 (93,311) (8,591) (15,255) (5,260) (7,780) (2,489) (157,781) (330,000) 879,343 1,362,107 (45,000) (6,872,700) (1,245,200) 106,270 2,673,983 (13,963,933) -8.93% -8.93% -8.93% -8.93% 137.67% -8.93% -8.93% -8.93% -8.93% -8.93% -8.93% -8.93% -8.93% 65.07% 7.43% -8.93% -48.60% -49.74% 0.16% 3.85% -57.71% 438.38% 142,168 1,138,905 1,281,073 (5,539) (88,294) (93,833) -3.75% -7.19% -6.82% 208.39% 2,842,147 (530,909) -15.74% 378.38% 366.80% 37.63% -22.41% -20.06% -42.16% -100.00% -86.54% 306.24% 2,842,147 8,670,829 (530,909) (13,526,857) -15.74% -60.94% Verticle Analysis Chester, Inc. Balance Sheet for years ending December 31, 2013 2014 Assets Current Assets: Cash and Cash Equivalent Accounts Receivable Other Receivables Allowance for Doubtful Accounts Inventory Reserve for Inventory Obsolescence Prepaid Insurance Prepaid Rent Office Supplies Investments Other Noncurrent Assets 4,056,327 20,513,628 0 (1,578,525) 23,531,507 (3,765,000) 929,143 250,000 9,259 715,864 67,301 8.82% 44.60% 0.00% -3.43% 51.16% -8.19% 2.02% 0.54% 0.02% 1.56% 0.15% 4,339,579 57,697,091 1,400,000 (1,387,691) 75,851,471 (12,136,103) 2,830,474 0 9,565 2,238,634 0 3.23% 43.00% 1.04% -1.03% 56.53% -9.04% 2.11% 0.00% 0.01% 1.67% 0.00% Total Current Assets Non Current Assets: 44,729,504 97.25% 130,843,020 97.51% 146,250 779,882 541,521 (205,000) 0.32% 1.70% 1.18% -0.45% 131,040 698,775 3,280,589 (764,692) 0.10% 0.52% 2.44% -0.57% 1,262,654 2.75% 3,345,711 2.49% 100.00% 134,188,731 100.00% Land Buildings and Land Improvements Machinery, Equipment, Office Furniture Accum. Depreciation Total Non Current Assets Total Assets 45,992,157 Liabilities And Stockholder's Equity Current Liabilities: Taxes Payable Accounts Payable Wages Payable FICA Employee Withholding Medicare Withholding Federal Payroll Taxes Payable State Payroll Taxes Payable FICA Employer Withholding Medicare Employer Withholding Current Portion Long-Term Debt Interest payable Bonuses payable Dividend payable Total Current Liabilities Long term Liabilities: Line of Credit Total Long Term Liabilities Total Liabilities Stockholder's Equity Common Stock Paid-in Capital Retained Earnings 0 5,791,398 36,838 1,648 730 7,541 3,519 1,648 730 0 0 0 6,000,000 11,844,053 0.00% 12.59% 0.08% 0.00% 0.00% 0.02% 0.01% 0.00% 0.00% 0.00% 0.00% 0.00% 13.05% 25.75% 3,205,440 22,488,866 264,513 9,452 12,785 132,256 61,720 9,452 12,785 13,440,000 470,311 504,000 15,250,000 55,861,581 2.39% 16.76% 0.20% 0.01% 0.01% 0.10% 0.05% 0.01% 0.01% 10.02% 0.35% 0.38% 11.36% 41.63% 12,500,000 12,500,000 24,344,053 27.18% 49,731,360 27.18% 49,731,360 52.93% 105,592,941 37.06% 37.06% 78.69% 10,131,250 9,278,750 2,238,105 22.03% 20.17% 4.87% 10,131,250 9,278,750 9,185,791 7.55% 6.91% 6.85% Total Equity Total Liabilities & Stockholder's Equity 21,648,105 45,992,157 47.07% 28,595,791 100.00% 134,188,732 21.31% 100.00% Chester, Inc. Income Statement For the Year Ending December 31, 2013 2014 Revenues: Sales Freight Sales Returns Cost of Goods Sold Gross Profit on Sales 307,716,148 5,378,689 5,621,979 176,961,527 119,753,953 100.00% 271,839,067 1.75% 4,749,095 1.83% 12,432,247 57.51% 161,029,981 38.92% 93,627,744 100.00% 1.75% 4.57% 59.24% 34.44% Operating Expenses: Selling Expenses Warranty Expense Advertising Expense Research and Development Expense Depreciation Expense Administrative Expenses: Warehouse Salaries Property Tax Expense Legal and Professional Expense Auto Expenses Bad Debt Expense Insurance Expense Maintenance Expense Utilities Phone Postal Miscellaneous Office Expense Payroll Tax Exp Pension/Profit-Sharing Plan Ex Rent or Lease Expense Administrative Wages Expense Bonus expense Income Tax Expense - Federal Income Tax Expense - State Total Operating Expenses Operating Income Other Income: Interest Income Income from Investments Other Expenses: Interest Expense 1,375,352 1,121,425 39,015,418 166,250 41,678,445 0.45% 0.36% 12.68% 0.05% 13.54% 1,297,104 1,161,276 592,335 581,012 3,631,727 0.48% 0.43% 0.22% 0.21% 1.34% 5,791,730 100,619 4,506,417 261,218 2,028,032 1,067,428 76,420 169,554 95,467 160,042 21,279 1,938,736 3,750,000 3,254,357 21,094,132 2,956,250 536,250 47,807,933 89,486,377 30,267,575 1.88% 0.03% 1.46% 0.08% 0.66% 0.35% 0.02% 0.06% 0.03% 0.05% 0.01% 0.63% 1.22% 1.06% 6.86% 0.00% 0.96% 0.17% 15.54% 29.08% 9.84% 5,348,208 111,252 10,435,113 235,763 5,875,403 1,045,085 96,220 170,855 58,911 87,140 27,879 1,767,149 3,696,000 1,351,363 18,344,399 504,000 14,142,240 2,503,200 65,800,180 69,431,908 24,195,836 1.97% 0.04% 3.84% 0.09% 2.16% 0.38% 0.04% 0.06% 0.02% 0.03% 0.01% 0.65% 1.36% 0.50% 6.75% 0.19% 5.20% 0.92% 24.21% 25.54% 8.90% 255,379 255,379 0.08% 0.00% 0.08% 147,707 1,227,199 1,374,906 0.05% 0.45% 0.51% 1,093,750 0.36% 3,373,056 1.24% Legal Settlement Net Income 23,965,000 25,058,750 5,464,204 7.79% 8.14% 1.78% 3,373,056 22,197,686 0.00% 1.24% 8.17% ber 31, 2015 4,451,964 49,042,528 1,200,000 (2,942,552) 65,990,780 (10,558,525) 2,667,722 0 9,182 2,070,736 0 3.88% 42.72% 1.05% -2.56% 57.49% -9.20% 2.32% 0.00% 0.01% 1.80% 0.00% 111,931,835 97.51% 131,040 833,775 3,280,589 (1,381,847) 0.00% 0.11% 0.73% 2.86% -1.20% 2,863,556 2.49% 114,795,391 100.00% 6,011,540 13,850,648 198,384 7,089 9,589 99,192 46,290 7,089 9,589 12,084,720 568,429 459,000 15,000,000 48,351,560 5.24% 12.07% 0.17% 0.01% 0.01% 0.09% 0.04% 0.01% 0.01% 10.53% 0.50% 0.40% 13.07% 42.12% 0.00% 38.48% 38.48% 80.60% 0.00% 8.83% 8.08% 2.49% 44,177,211 44,177,211 92,528,771 10,131,250 9,278,750 2,856,620 22,266,620 114,795,391 19.40% 100.00% 2015 288,876,206 4,325,068 23,110,096 179,103,248 82,337,793 100.00% 1.50% 8.00% 62.00% 28.50% 1,444,381 1,057,591 3,080,313 617,155 6,199,439 0.50% 0.37% 1.07% 0.21% 2.15% 4,870,689 101,319 9,503,406 214,713 13,963,800 951,774 87,629 155,600 53,651 79,360 25,390 1,609,368 3,366,000 2,230,705 19,706,506 459,000 7,269,540 1,258,000 65,906,451 72,105,890 10,231,903 1.69% 0.04% 3.29% 0.07% 4.83% 0.33% 0.03% 0.05% 0.02% 0.03% 0.01% 0.56% 1.17% 0.77% 6.82% 0.16% 2.52% 0.44% 22.81% 24.96% 3.54% 142,168 1,138,905 1,281,073 0.05% 0.39% 0.44% 2,842,147 0.98% 2,842,147 8,670,829 0.00% 0.98% 3.00% ACC 700 Milestone Two Guidelines and Rubric The second milestone is a rough draft of the second artifact for your professional portfolio, a sample audit. The sample audit will consist of three main parts: the business risk analysis, the sample audit program, and the report of recommendations. This will be graded using the rubric at the end of this document and is an opportunity for you to organize your thoughts and receive feedback from your instructor for the final submission. Note that the submission guidelines for this milestone are less demanding than those for the final submission. Once you have submitted this milestone and received feedback from your instructor, it is up to you to incorporate this feedback and complete the artifact by meeting the submission requirements found in the Final Project Guidelines and Rubric document. Newham Company Information Newham Company is a publicly traded company operating in the \"personal product\" industry. Newham manufactures cosmetic and body-care products. These products are sold to large department chain stores, such as Target and Walmart, to be sold and distributed to the final consumer. Competitors include Revlon, Inc. (REV - NYSE) and Avon Products, Inc. (AVP - NYSE). Newham Company has experienced steady growth over the past several years. Recently, there has been a change in executive management, including the CEO and CFO. The change was sparked by questionable bonus payments that were paid to the executive management team based on the company's performance. In addition, a recent lawsuit has been filed based on claims that a new product was not properly advertised, leading many customers to experience allergic reactions. Sales and Accounts Receivable A sample of weekly sales invoices shall be analyzed from the sales report by product category. All sales are on account. Sales are classified into four product categories: cosmetics, skin care, fragrance, and personal care. Charges to customer accounts should be dated with the date of shipment. Sales invoices are prepared in batches on a daily basis using numbered sales invoices. Sales invoice numbers are automatically generated by the company's computer system. The accounts receivable clerk does not have appropriate computer rights to override the computer-generated invoice number. Upon preparing sales invoices, the accounts receivable clerk verifies that the first invoice number of the batch is consistent with the last invoice number of the previous batch. Inconsistencies or skipped sales invoice numbers are investigated and resolved before new sales invoices are prepared. The items shipped are compared to the items billed for proper quantity, price, and other sales order terms. The accounting department supervisor compares and reconciles a copy of the daily sales invoice batch report to the daily accounts posting report indicating the individual accounts. The daily account posting report is prepared and sent by the accounts receivable department. Discrepancies are investigated and resolved to help assure that the customer subsidiary accounts are posted for the same total amount posted to the control account. At the end of each month, the total of the trial balance of customer account balances (prepared by the accounts receivable department) are reconciled to the general ledger control account by the accounting department supervisor. Sales invoice batches are dated with the date of shipment, and totals of each batches are accumulated each month and recorded in the accounts receivable control and sales revenue accounts. The accounting department supervisor approves all monthly summary entries before posting to the general ledger. The controller approves all cash refunds and allowance credit memos for sales returns, after initiation by customer service. Cash Management The monthly bank statements are mailed to the controller's office. Duplicate deposit slips are retained and used when bank deposits are made, the cash receipts journal listing, and the cash disbursements listing to reconcile the general bank accounts. The payroll bank account is also reconciled, utilizing the payroll register retained by the controller's office. The assistant controller oversees all cash management and activity, including the performance of the bank account reconciliation for each bank account held by the company. The assistant controller compares the cash receipts journal and daily deposit records with the bank deposits and duplicate deposit slips during the bank account reconciliation. Internal auditors will randomly review the bank account reconciliations. Cash Receipts and Accounts Receivable Processing All cash receipts from customers related to sales are credited to accounts receivable individual and control accounts. Cash receipts are received by mail and opened by the office secretary. The office secretary prepares the cash receipt listing and daily deposit. A copy of the cash receipt listing and duplicate deposit slip is sent to the controller's office. Another copy of the cash receipt listing and the remittance advice are sent to the accounts receivable clerk for posting. The accounts receivable department posts credits to individual customer accounts, dating the entries with the date of the remittance advice and cash receipt listing received. Statements of accounts receivable balances are mailed to customers each month by the accounts receivable accounting department. Customers' reports of disputes or differences shall be handled by customer service. Cash Disbursements All disbursements are made by check, signed by the controller. Artifact Two: Sample Audit Program Your second portfolio artifact will be the professional audit program based on PCAOB audit standards that you create for Newham, an influential client at S.N.H.U, LLC. Make sure to incorporate the feedback you receive from your instructor while developing this audit program. The following sections should be included: Business Risk Analysis: Identifying risk in an organization and the environment in which it operates is the first step in approaching a potential audit and designing an effective audit program. To analyze business risk, you must: o o o o Gain an understanding of Newham Investigate the industry in which Newham operates Analyze and assess the risk, including fraud, involved in the company and industry Identify the relevant PCAOB audit standards and address their relevance to the Newham audit risk assessment Sample Audit Program: An audit program involves compiling a list (program) of procedures for the auditors to perform in order to obtain evidence and reasonable assurance that internal controls are operating properly and thus producing accurate financial statements. To compile a sample audit program, you have been provided with tests of control in revenue and inventory. You must identify the relevant PCAOB audit standards and address their relevance to the Newham audit program. Include other elements as applicable to Newham. Report of Recommendations: Based on an auditor's experiences and knowledge of accounting, finance, and common errors or pitfalls, it is common for an auditor to provide recommendations. The sample audit program addressed here is merely a small sample, not a comprehensive program. Thus, recommendations for further risk analysis, sample methods, and other concerns should be offered. In your report of recommendations to the head of the new audit team, include the following sections: o o o o Explanation of findings in the risk analysis Sarbanes-Oxley concerns or requirements Recommendations on appropriate sampling methods Recommendations for preparation and success in the external audit Guidelines for Submission: Your paper must be submitted as a two- to three-page Microsoft Word document with double spacing, 12-point Times New Roman font, one-inch margins, and at least three sources cited in APA format. Round all answers up to the nearest dollar value in any calculations. Note that this milestone is a rough draft and the submission guidelines are different for the final project. The final paper will be four to five pages in length with at least seven sources. Refer to the submission guidelines in the Final Project Guidelines and Rubric document. Instructor Feedback: This activity uses an integrated rubric in Blackboard. Students can view instructor feedback in the Grade Center. For more information, review these instructions. Critical Elements Business Risk Analysis Sample Audit Program Report of Recommendations Articulation of Response Proficient (100%) Identifies risk in the organization and the environment in which it operates; clearly shows an understanding of Newham and the industry; assesses risk and identifies any relevant PCAOB audit standards Identifies the relevant PCAOB audit standards and addresses their relevance to the Newham audit program Provides recommendations as to explanation of findings, Sarbanes-Oxley concerns, appropriate sampling methods, and the external audit Submission has no major errors related to citations, grammar, spelling, syntax, or organization Not Proficient (0%) Does not identify risk in the organization or the environment in which it operates; does not show an understanding of Newham or the industry; does not assess risk or identify any relevant PCAOB audit standards Does not identify the relevant PCAOB audit standards or address their relevance to the Newham audit program Does not provide recommendations as to explanation of findings, Sarbanes-Oxley concerns, appropriate sampling methods, and the external audit Submission has critical errors related to citations, grammar, spelling, syntax, or organization that prevent understanding of ideas Earned Total Value 30 30 30 10 100% Newham, Inc. Trial Balances for years ending December 31, 2013, 2014 and 2015 Account Description Cash on Hand Regular Checking Account Payroll Account Accounts Receivable Allowance for Doubtful Accounts Inventory Prepaid Insurance Office Supplies Land Buildings and Land Improvements Office Equipment and Furniture Accum. Depreciation Other Noncurrent Assets Accounts Payable Wages Payable Accrued Liabilities Line of Credit Common Stock Paid-in Capital Retained Earnings Sales Sales Returns Warranty Expense Cost of Goods Sold Freight Advertising Expense Auto Expenses Depreciation Expense Warehouse Salaries Legal and Professional Expense Bad Debt Expense Insurance Expense Maintenance Expense Utilities Phone Postal Miscellaneous Office Expense Payroll Tax Exp Retirement Plan Ex Rent or Lease Expense 2013 $ 2,400 $ 747,000 1,025 513,000 (78,525) 1,531,507 9,143 259 846,250 759,882 841,521 (423,800) 250 (791,397) (36,838) (1,648) (25,000) (1,531,250) (1,278,750) (796,136) (1,984,641) 12,979 3,753 856,326 8,689 12,425 6,218 26,250 91,730 6,417 8,032 6,428 5,420 9,554 5,467 642 1,279 97,151 75,000 54,357 2014 $ Change 2,548 $ 553,960 860 697,092 (87,691) 1,585,734 8,305 565 ### 771,882 580,589 (351,643) ### (488,867) (54,513) (1,452) (23,250) ### ### (1,087,041) (1,620,560) 32,347 7,104 640,300 9,095 15,125 5,763 72,157 94,802 5,113 7,569 5,085 6,220 7,855 8,911 740 3,879 87,840 60,000 51,363 148 (193,040) (165) 184,092 (9,166) 54,227 (838) 306 12,000 (260,933) 72,157 302,530 (17,675) 196 1,750 (290,905) 364,081 19,368 3,351 (216,026) 406 2,700 (455) 45,907 3,072 (1,304) (463) (1,343) 800 (1,699) 3,444 98 2,600 (9,311) (15,000) (2,994) %Change 6% -26% -16% 36% 12% 4% -9% 119% 0% 2% -31% -17% 0% -38% 48% -12% -7% 0% 0% 37% -18% 149% 89% -25% 5% 22% -7% 175% 3% -20% -6% -21% 15% -18% 63% 15% 203% -10% -20% -6% Administrative Wages Expense Interest Expense Income Tax Expense - Federal Income Tax Expense - State 394,024 2,000 6,250 3,345 344,399 1,860 4,240 3,200 (49,625) (140) (2,010) (145) -13% -7% -32% -4% d 2015 2015 $ 2,599 $ 643,802 945 942,528 (42,552) 1,599,078 7,722 982 846,250 771,882 595,169 (355,433) 250 (450,648) (8,145) (1,546) (35,690) (1,531,250) (1,278,750) (1,232,634) (2,064,809) 23,096 4,481 791,035 5,068 17,507 4,713 33,791 96,792 3,406 3,800 5,774 7,629 5,600 5,651 360 25,390 86,672 63,000 53,705 $ Change 51 89,842 85 245,436 45,139 13,344 (583) 417 14,580 (3,791) 38,219 46,368 (94) (12,440) (145,593) (444,249) (9,251) (2,623) 150,735 (4,027) 2,382 (1,050) (38,366) 1,990 (1,707) (3,769) 689 1,409 (2,255) (3,260) (380) 21,511 (1,169) 3,000 2,342 %Change 2% 16% 10% 35% -51% 1% -7% 74% 0% 0% 3% 1% 0% -8% -85% 6% 54% 0% 0% 13% 27% -29% -37% 24% -44% 16% -18% -53% 2% -33% -50% 14% 23% -29% -37% -51% 555% -1% 5% 5% 336,566 1,860 9,540 2,800 (7,833) 5,300 (400) -2% 0% 125% -13% ACC 700 Milestone Two Test of Control Results Newham, Inc. Test of Controls Results - Revenue December 31, 2015 Of the 213 sales transactions examined, 82 \"deviations\" were identified: No credit approval was found on 42 sample items The wrong quantity billed was identified on five sample items There was a mathematical error on 10 sample items No shipping document could be located for 25 sample items Following are the procedures used: 1. We randomly chose the sample of 216 transactions across the year with 18 from each calendar month. 2. All of the invoices in the sample were found. None were missing. 3. All of the invoices were properly posted to the general ledger sales and accounts receivable control accounts, and each was posted to the right customer's individual account. FINANCIAL ANALYSIS Chester, Inc. Analysis of Ratios Liquidity Ratios Current Ratio: The current ratio of Chester, Inc. has shown a declining trend during the period of analysis. This ratio measures the ability of company to pay its short term commitments or current liabilities from its current assets. The ideal current ratio is 2. To calculate this ratio current assets are divided by current liabilities. The ratio of company was 3.78 in fiscal year 2013 which declined to 2.31 in fiscal year 2015. The ratio is lower in comparison to 3.13 of Under Armour and 3.03 of the industry. But the ratio of company is still higher and is above the ideal ratio. The ratio suggests that the company has a good liquidity and will be easily able to pay it short term commitments from its current liabilities. Quick Ratio: This ratio calculates the ability of company to pay its short term obligations or current liabilities from its quick assets. To calculate this ratio quick assets are divided by current liabilities. A quick ratio of 1 is considered ideal. To calculate this ratio quick assets are divided by current liabilities. The quick ratio of company has also declined during last three years from 2.00 in fiscal 2013 to 1.11 during fiscal year 2015. The ratio of company is better than industry ratio of 0.46 but is marginally lower than ratio of Under Armour at 1.18. Solvency Ratios Total Debts to Assets: It is a leverage ratio that calculates total debts in relation to the assets of company. It measures the amount of total assets that are financed by creditors in relation to assets. In other words it calculates that percentage of assets that are funded by creditors. To calculate this ratio total debts are divided by total assets. The ratio of company has significantly increased during last three years from 0.53 in fiscal year 2013 to 0.81 in fiscal year 2015. It indicates that the debt financing of the company has increased during last three years. Total Debts to Equity: This ratio measures total debts of the company in relation to stockholder's equity. In other words it calculates the percentage of financing that comes from creditors in relation to stockholder's equity. To calculate this ratio total debts are divided by total stockholder's equity. The ratio of the company has increased significantly from 1.12 in fiscal year 2013 to 4.16 in fiscal year 2015. It indicates that the company has increased its debts during last three years. The ratio of industry stood quite lower at 0.31 and that of Under Armour also stood at 0.38. The ratio suggests that the company is high on debts. Long Term Debts to Total Assets: This ratio calculates total long term debts as percentage of total assets. In other words it calculates long term debts as a percentage of total assets. To calculate this ratio long term debts are divided by total assets. Owing to increase in long term debts the ratio of company has increased significantly and has almost doubled from 0.13 in 2013 to 0.24 in 2015. The ratio indicates that long terms of the company have increased significantly. Profitability Ratios Net profit Margin: This ratio measures the net income that is earned by the company from each dollar of sales generated. It makes a comparison of net income with net sales of the company. In other words this ratio calculates the percentage of sales that is left after paying all the business expenses. The ratio of company had not been stable during last three years. The ratio was low at 1.78% during fiscal year 2013 which increased considerably during fiscal year 2014 to 8.17% and again declined during fiscal year 2015 and stood at 3.0%. The ratio of company was lower than ratio of industry in fiscal year 2015. The ratio of industry was 8.73% and that of Under Armour was 5.87%. The ratios suggest that the performance of Chester, Inc. was lower than that of its competitor and industry. Gross Profit Margin: The gross profit margin measures the profitability of the company on selling its inventory or merchandise. To calculate this ratio gross profit is divided by net sales. The ratio of Chester, Inc. has shown a decreasing trend and the ratio declined from 38.92% in fiscal year 2013 to 34.44% and 28.50% during fiscal year 2014 and 2015 respectively. The ratio of company was significantly lower in comparison to the ratio of industry and the ratio of Under Armour which stood at 19.89% and 48.10% respectively. It suggests that the Chester, Inc. earns less gross profit in selling its merchandise inventory. Return on Investment: This ratio calculates the efficiency of the business firm in generating net income from its assets. To calculate this ratio net income is divided by total assets. The ratio of Chester, Inc. was 11.88% during the fiscal year 2013 which increased to 16.54% during fiscal year 2014. But owing to decrease in net income the ratio of company decreased in 2015 and stood at 7.55%. The ratio of Chester, Inc. stood below the ratio of industry and Under Armour indicating low utilization of assets. Horizontal Analysis Balance Sheet Most of the items of balance sheet have shown decreasing trend during fiscal year 2015. Cash and cash equivalents increased by 6.98% during fiscal year 2014 but the increase decreased in 2015 and stood at 2.59% during fiscal year 2015. Accounts receivables increased by 181.26% during fiscal year 2014 but it declined by 15% during the fiscal year 2015. Total current assets showed an increase of 192.52% during fiscal year 2014 whereas during 2015 it declined by 14.45%. Accounts payable increased by 288.32% during fiscal year 2014 whereas it declined by 38.41% during fiscal year 2015. Total current assets increased by 371.64% during fiscal year 2014 but decreased by13.44% during fiscal year 2015. Line of credit also increased in 2014 by 297.85% and decreased by 11.17% during fiscal year 2015. Retained earnings increased by 310.43% during fiscal year 2014 but declined by 68.90% during fiscal year 2015 indicating the use of retained money. The above analysis reveals that overall financial performance of Chester, Inc. was deteriorated during fiscal year 2015. Income Statement During the fiscal year 2014 sales decreased by 11.66% whereas it increased by 6.27% during the fiscal year 2015. Gross profit decreased during both the years and declined by 21.82% and 12.06% during fiscal year 2014 and 2015 respectively. Rent and lease expenses decreased during fiscal year 2014 by 58.48% whereas the same increased by 65.07% during fiscal year 2015, indicating increase in expenses. Operating income increased by 20.06% during fiscal year 2014 and also declined by 57.17% during fiscal year 2015. Net income increased by 306.24% during fiscal year 2014 whereas it declined by 60.94% during fiscal year 2015. Vertical Analysis Balance sheet The vertical analysis also reveals weak indication of the financial performance of the company during the fiscal year 2015. Cash and cash equivalent were 8.82 % of total assets during fiscal year 2013 which decreased during fiscal year 2015 and stood at 3.88% of total assets. Accounts receivables decreased from 43% of total assets in fiscal year 2014 to 42.72% during fiscal year 2015. Total current assets improved marginally and stood at 97.51% during fiscal year 2014 and 2015 as compared to 97.25% during fiscal year 2013. Total non-current assets decreased from 2.75% of total asset in 2013 to 2.49% of total asset during fiscal year 2014 and 2015. Total current liabilities were 25.75% of total assets during fiscal year 2013 which increased in fiscal year 2014 and 2015 and stood at 41.63% and 42.12% respectively. Total liabilities of Chester, Inc. increased significantly during fiscal year 2014 and 2015 and stood at 78.69% and 80.60% respectively as compared to 52.93% of total assets during fiscal year 2013. It indicates increase in debts and other liabilities of the company. Retained earnings were 4.87% of total assets during fiscal year 2013 which increased in 2014 at 6.85% and decreased again in 2015 and stood at 2.49% of total assets. Total equity showed declining trend and decreased from 47.07% in fiscal year 2013 to 19.40% in fiscal year 2015. Income Statement Gross profit of Chester, Inc. showed declining trend and it decreased from 38.92% of sales in fiscal year 2013 to 34.44% and 28.50% during fiscal year 2014 and 2015 respectively. Operating expenses were 29.08 % of sales during fiscal year 2013 which increased to 25.54% during fiscal year 2014 and again decreased during fiscal year 2015 and stood at 24.96% of sales. Net income of company was 1.78% of sale during fiscal year 2013 which increased significantly to 8.17% during fiscal year 2014 but decreased again and stood at 3% of sale during the fiscal year 2015. Milestone One Guidelines and Rubric The first milestone is a rough draft of the first artifact for your professional portfolio, financial statements and analysis. You will complete a set of financials as described in the appendix section of the prompt below for a fictitious company called Chester Inc. You will then submit a report of your findings and recommendations. This will be graded using the rubric at the end of this document and is an opportunity for you to organize your thoughts and receive feedback from your instructor for the final submission. You should note that the submission guidelines for this milestone are less demanding than those for the final submission. Once you have submitted this milestone and received feedback from your instructor, it is up to you to incorporate this feedback and complete the artifact by meeting the submission guidelines found in the Final Project Guidelines and Rubric document. Client One - Chester, Inc. (Financial Statements and Analysis) Chester, Inc. is a large, publicly traded client at S.N.H.U., LLC. Your task is to develop a comprehensive, professional report for the board of directors. To do this, you will use Chester, Inc.'s trial balance to compose comparative financial statements, analyze data, and interpret results. These financial statements must be in good form in accordance with Generally Accepted Accounting Principles (GAAP). Next, you will assess the performance of Chester, Inc. using the financial statements that you created, along with industry performance data and the financial statements of a competitor. In addition, Chester, Inc. is considering expanding into the global market. They would like you to highlight key areas of the financial statements you have prepared and identify how they would be reported differently if composed under International Financial Reporting Standards (IFRS) rather than GAAP. Background and Financial Information Chester, Inc. is a large, publicly traded client operating in athletic wear including clothing, shoes, and accessories. Direct competitors include Columbia Sportswear Company (COLM - NYSE) and Under Armour, Inc. (UA - NYSE). All of these companies operate in the textile-apparel clothing industry. Chester Inc. operates on a calendar year. Reference the Milestone One Chester Inc. Trial Balance spreadsheet (Please see the Excel) for the past three years' financials (2013, 2014, and 2015). Additional information: Land with the land improvements were sold at book value (no gain or loss) in 2014. (Note: To evaluate the sale, use the following accounts: land, building and land improvements, and Other Noncurrent Assets) x New equipment purchased with cash for $2,739,067 in 2014 x New storage building purchased with cash for $135,000 in 2015 x No investments have been sold or purchased in 2014 or 2015 x There are currently 8,275,000 shares of common stock outstanding. No additional common stock has been sold or repurchased in any of the aforementioned years. Artifact One: Financial Statements and Analysis The first artifact that you will include in your portfolio is the comprehensive, professional report that you create for the board of directors of Chester, Inc.a large publicly traded client at S.N.H.U., LLC. The report should contain your findings with the financial statements package as an appendix (Excel attachment). Incorporate the feedback that you receive from your instructor during the development of this artifact. Appendix: These sections should be completed first, before you write your report. Use the proper format for each section in accordance with Generally Accepted Accounting Principles (GAAP) and note and explain differences under International Financial Reporting Standards (IFRS) where appropriate: Income statement Balance sheet Statement of retained earnings Statement of cash flows (indirect method) Ratio analysis o Liquidity - minimum of three key ratios with supporting calculations with a minimum of three years of data o Profitability - minimum of three key ratios with supporting calculations with a minimum of three years of data o Solvency - minimum of three key ratios with supporting calculations with a minimum of three years of data Vertical and horizontal analysis o Both vertical and horizontal for the income statement with a minimum of three years of data o Both vertical and horizontal for the balance sheet with a minimum of three years of data Report of Findings and Recommendations: The report is the key section of this artifact and will be written after you complete the analysis in the sections in the appendix above. The report will demonstrate your understanding of financial statements, what they contain, what they mean, and how they are used in strategic decision making. As you know, numbers are useless if we do not know what they mean and how to use them. The financial statements, ratios, and vertical/horizontal analysis should be analyzed and interpreted in order to assess and explain the performance of the organization. In your report, you must: x Address all three key ratios in each ratio category. Include what each ratio indicates and how the organization performed against its key competitor and industry averages. x Address all key findings in the vertical and horizontal analysis of the income statement and balance sheet. As a general rule, anything over 10% warrants addressing. Guidelines for Submission: All financial calculations should be complete. Your paper must be submitted as a four- to five-page Microsoft Word document with double spacing, 12-point Times New Roman font, one-inch margins, and two to three sources cited in APA format. Round all answers up to the nearest dollar value in any calculations. Note that this milestone is a rough draft and the submission guidelines are different for the final project. The final paper will be 8-10 pages in length with at least five sources. Refer to the guidelines for submission in the Final Project Guidelines and Rubric document. Instructor Feedback: This activity uses an integrated rubric in Blackboard. Students can view instructor feedback in the Grade Center. For more information, review Critical Elements Income Statement Balance Sheet Statement of Retained Earnings Statement of Cash Flows Proficient (100%) Completes the income statement using the proper format for each section in accordance with Generally Accepted Accounting Principles (GAAP) and notes and explains differences under International Financial Reporting Standards (IFRS) where appropriate Completes the balance sheet using the proper format for each section in accordance with Generally Accepted Accounting Principles (GAAP) and notes and explains differences under International Financial Reporting Standards (IFRS) where appropriate Completes the statement of retained earnings using the proper format for each section in accordance with Generally Accepted Accounting Principles (GAAP) and notes and explains differences under International Financial Reporting Standards (IFRS) where appropriate Completes the statement of cash flows using the proper format for each section in accordance with Generally Accepted Accounting Principles (GAAP) and notes and explains differences under International Financial Reporting Standards (IFRS) where appropriate Not Proficient (0%) Does not complete the income statement using the proper format for each section in accordance with Generally Accepted Accounting Principles (GAAP); differences under International Financial Reporting Standards (IFRS) are not noted or explained Value 5 Does not complete the balance sheet using the proper format for each section in accordance with Generally Accepted Accounting Principles (GAAP); differences under International Financial Reporting Standards (IFRS) are not noted or explained 10 Does not complete the statement of retained earnings using the proper format for each section in accordance with Generally Accepted Accounting Principles (GAAP); differences under International Financial Reporting Standards (IFRS) are not noted or explained Does not complete the statement of cash flows using the proper format for each section in accordance with Generally Accepted Accounting Principles (GAAP); differences under International Financial Reporting Standards (IFRS) are not noted or explained 10 10 Ratio Analysis Vertical and Horizontal Analysis Key Ratios Vertical and Horizontal Analysis Articulation of Response Performs a ratio analysis for liquidity, profitability, and solvency with a minimum of three years of data using the proper format for each section in accordance with Generally Accepted Accounting Principles (GAAP) and notes and explains differences under International Financial Reporting Standards (IFRS) where appropriate Performs a vertical and horizontal analysis of the income statement and balance sheet using the proper format for each section in accordance with Generally Accepted Accounting Principles (GAAP) and notes and explains differences under International Financial Reporting Standards (IFRS) where appropriate Does not perform a ratio analysis for liquidity, profitability, and solvency with a minimum of three years of data using the proper format for each section in accordance with Generally Accepted Accounting Principles (GAAP); differences under International Financial Reporting Standards (IFRS) are not noted or explained 10 Does not perform a vertical and horizontal analysis of the income statement and balance sheet using the proper format for each section in accordance with Generally Accepted Accounting Principles (GAAP); differences under International Financial Reporting Standards (IFRS) are not noted or explained 10 Addresses all three key ratios in each ratio category; includes what each ratio indicates and how the organization performed against its key competitor and industry averages Addresses all key findings in the vertical and horizontal analysis of the income statement and balance sheet Submission has no major errors related to citations, grammar, spelling, syntax, or organization Does not address all three key ratios in each ratio category or include what each ratio indicates and how the organization performed against its key competitor and industry averages Does not address all key findings in the vertical and horizontal analysis of the income statement and balance sheet Submission has critical errors related to citations, grammar, spelling, syntax, or organization that prevent understanding of ideas Earned Total 20 20 5 100% Chester, Inc. Trial Balances for years ending December 31, 2013, 2014, and 2015 Account Description Cash on Hand Regular Checking Account Savings Account Accounts Receivable Other Receivables Allowance for Doubtful Accounts Inventory Reserve for Inventory Obsolescence Prepaid Insurance Prepaid Rent Office Supplies Land Buildings and Land Improvements Machinery, Equipment, Office Furniture Accum. Depreciation Investments Other Noncurrent Assets Taxes Receivable/payable Accounts Payable Wages Payable FICA Employee Withholding Medicare Withholding Federal Payroll Taxes Payable State Payroll Taxes Payable FICA Employer Withholding Medicare Employer Withholding Line of Credit Current Portion Long-Term Debt Interest payable Bonuses payable Dividend payable Common Stock Paid-in Capital Retained Earnings Dividends Sales Sales Returns Warranty Expense Income from Investments Interest Income 2013 $ 2,484 $ 247,646 3,806,198 20,513,628 (1,578,525) 23,531,507 (3,765,000) 929,143 250,000 9,259 146,250 779,882 541,521 (205,000) 715,864 67,301 (5,791,398) (36,838) (1,648) (730) (7,541) (3,519) (1,648) (730) (12,500,000) (6,000,000) (10,131,250) (9,278,750) (2,773,901) 6,000,000 (307,716,148) 5,621,979 1,375,352 (255,379) 2014 2,548 253,960 4,083,071 57,697,091 1,400,000 (1,387,691) 75,851,471 (12,136,103) 2,830,474 9,565 131,040 698,775 3,280,589 (764,692) 2,238,634 (3,205,440) (22,488,866) (264,513) (9,452) (12,785) (132,256) (61,720) (9,452) (12,785) (49,731,360) (13,440,000) (470,311) (504,000) (15,250,000) (10,131,250) (9,278,750) (2,238,105) 15,250,000 (271,839,067) 12,432,247 1,297,104 (1,227,199) (147,707) Cost of Goods Sold Freight Advertising Expense Auto Expenses Research and Development Depreciation Expense Warehouse Salaries Property Tax Expense Legal and Professional Expense Bad Debt Expense Insurance Expense Maintenance Expense Utilities Phone 176,961,527 5,378,689 1,121,425 261,218 39,015,418 166,250 5,791,730 100,619 4,506,417 2,028,032 1,067,428 76,420 169,554 95,467 161,029,981 4,749,095 1,161,276 235,763 592,335 581,012 5,348,208 111,252 10,435,113 5,875,403 1,045,085 96,220 170,855 58,911 Postal Miscellaneous Office Expense Payroll Tax Exp Pension/Profit-Sharing Plan Ex Rent or Lease Expense Administrative Wages Expense Bonus expense Interest Expense Income Tax Expense - Federal Income Tax Expense - State Loss on Legal Settlement 160,042 21,279 1,938,736 3,750,000 3,254,357 21,094,132 1,093,750 2,956,250 536,250 23,965,000 87,140 27,879 1,767,149 3,696,000 1,351,363 18,344,399 504,000 3,373,056 14,142,240 2,503,200 - 3, 2014, and 2015 2015 $ 2,599 243,802 4,205,563 49,042,528 1,200,000 (2,942,552) 65,990,780 (10,558,525) 2,667,722 9,182 131,040 833,775 3,280,589 (1,381,847) 2,070,736 (6,011,540) (13,850,648) (198,384) (7,089) (9,589) (99,192) (46,290) (7,089) (9,589) (44,177,211) (12,084,720) (568,429) (459,000) (15,000,000) (10,131,250) (9,278,750) (9,185,791) 15,000,000 (288,876,206) 23,110,096 1,444,381 (1,138,905) (142,168) 179,103,248 4,325,068 1,057,591 214,713 3,080,313 617,155 4,870,689 101,319 9,503,406 13,963,800 951,774 87,629 155,600 53,651 79,360 25,390 1,609,368 3,366,000 2,230,705 19,706,506 459,000 2,842,147 7,269,540 1,258,000 - 1 Business risks analysis Business risk is any potential matter or factor that may affect a business in its intent to achieve its objectives and goals. Who puts out the standards? The relevant standard that gives guidelines on how to conduct a business risk analysis is outlined in AS 12 which expands on identification and assessment of risks of material misstatements. The standard requires an auditor to gain an understanding of the internal and external environment and perform analytical procedures (PCAOB, 2010). Identified business risk matters Matters Explanation great way to format the risks Change in Management The business changed the Executive Management that included both the CEO and CFO Pending lawsuit The company has an ongoing lawsuit due to the improper advertisement of a product. As a result, the customers have suffered allergic reactions Internal control The assistant controller is in charge of all cash activities and management including bank procedures reconciliations. The office secretary is the one who receives receipts by mail and still is the one who prepares the cash receipt listing and daily posts. The presence of competitors Avon products incorporation and Revlon are major competitors in the personal product market. Interim standard 350 is relevant when it comes to audit sampling. The standard highlights how to perform an audit procedure to a lesser number of items in a class or account balance. AS 2315 also explains how to sample substantive tests and tests of control (Knechel, 2007). The first step is to specify the audit test objective, the sampling unit, and items to be tested. 2 Objective Number of elements without credit approval Sample Sales transactions Control attribute Credit approval The next step is to calculate the confidence levels, expected deviation rate, and tolerable rate. The samples are then selected randomly from the population after which there will be a comparison between controls in place and the documented credit approvals. The upper deviation rate will be calculated and then compared to the tolerable rate. Report of recommendations Explanation The new management may be risk takers suggesting that the business will be exposed to various hazards. The changeover also suggests that the commitment to improve the internal controls and cooperation with the engagement team will also change. The lawsuit has the potential to tarnish the brand image of the company and a contracting customer base. The product under scrutiny will have minimum sales volume, and the company will lose the opportunity to recover the development, production, and advertising costs. The legal suit also means that there will be cash outflows from the company in a bid to defend itself against the case. The internal controls over cash management and cash receipts are potential avenues for misappropriation and fraud within the enterprise. Competition poses a huge threat on the maximum sales volume that Newham is expected to sell in the market and consequently on the size of the client base. The competition also means that the companies have to compete for the limited shelf spaces at the large chain stores. Sarbanes-Oxley concerns or requirements 3 Spell out upon first use Section 302 of the Act indicate that both CFO and CEO must accept the responsibility for the internal controls and have managed it for the last 90 days. Internal control procedures are also needed to exercise segregation of duties so as to avoid multiple operations of activities by one person (Hoitash & Berdad, 2008). Appropriate sampling methods What is the attribute sampling technique? The entity should use attribute sampling technique so as to focus on specific items such as sales transactions. The sample selection should also be random to avoid bias and ensure that the sample size is small to allow for tests of controls sampling. Recommendation for external audit The management of Newham should first ensure that the internal controls are efficient and correct the internal business risks identified. All supporting documents such as the shipping documents should be available and stored properly for ease of access whenever required. Consider a summary paragraph Need to create the audit plan, which is the checklist that will guide the auditor when onsite. Please address the audit findings. What was the outcome of the audit and what does management need to change? 4 Reference Hoitash, R., Hoitash, U., & Bedard, J. C. (2008). Internal control quality and audit pricing under the Sarbanes-Oxley Act. Auditing: A Journal of Practice & Theory, 27(1), 105-126. Knechel, W. R. (2007). The business risk audit: Origins, obstacles and opportunities. Accounting, Organizations and Society, 32(4), 383-408. Public Company Accounting Oversight Board (PCAOB). (2010). Identifying and Assessing Risks of Material Misstatement. Auditing Standard No. 12. 1 Business risks analysis Business risk is any potential matter or factor that may affect a business in its intent to achieve its objectives and goals. Who puts out the standards? The relevant standard that gives guidelines on how to conduct a business risk analysis is outlined in AS 12 which expands on identification and assessment of risks of material misstatements. The standard requires an auditor to gain an understanding of the internal and external environment and perform analytical procedures (PCAOB, 2010). Identified business risk matters Matters Explanation great way to format the risks Change in Management The business changed the Executive Management that included both the CEO and CFO Pending lawsuit The company has an ongoing lawsuit due to the improper advertisement of a product. As a result, the customers have suffered allergic reactions Internal control The assistant controller is in charge of all cash activities and management including bank procedures reconciliations. The office secretary is the one who receives receipts by mail and still is the one who prepares the cash receipt listing and daily posts. The presence of competitors Avon products incorporation and Revlon are major competitors in the personal product market. Interim standard 350 is relevant when it comes to audit sampling. The standard highlights how to perform an audit procedure to a lesser number of items in a class or account balance. AS 2315 also explains how to sample substantive tests and tests of control (Knechel, 2007). The first step is to specify the audit test objective, the sampling unit, and items to be tested. 2 Objective Number of elements without credit approval Sample Sales transactions