Interest expense 1 1 ABC, Inc. 2. Analytical Review Procedures 3 Year Ended December 31, 2017 It is January 2018 and you are a staff accountant assigned to the 2017 audit of ABC Inc. ABC is a closely held corporation managed by the founder and principal shareholder, Agatha Bernice Christy. Your firm has audited ABC for the last five years. The audited financial statements for the years ended December 31, 2016 and 2015 are presented 4 below, with the client's unaudited financial statements for 2017. 5 Additional Information: 6 - ABC manufactures and sells drones for industrial use and cattle prods for ranching. 7 All sales are on credit. Credit terms are net 30 days. 8 - ABC offers a one-year warranty covering manufacturing defects. - ABC uses a periodic inventory system and determines its year-end inventory by taking a physical count on December 31. You and your supervisor observed the count on December 31, 2017 and 9 9 performed numerous test counts, but you have not performed further audit tests regarding inventory. The interest rate on all debt is 8 percent. Annual interest and principal payments are due each 10 December 1. 11 - Average Common Shares Outstanding is 10,000 for each year. 12 INCOME STATEMENTS ($000's) 13 Years ended December 31 2017 2016 2015 14 Sales revenue S 7,750 $ 7,713 S 7,493 15 Cost of goods sold 5,505 5.381 5,225 16 Gross profit 2.245 2,332 2.268 17 Selling and general expenses 1,631 1,622 1,577 18 Depreciation expense 46 55 49 19 Warranty expense 75 65 55 20 Bad debt expense 90 85 90 21 Legal fees 53 14 12 22 110 127 135 23 Income before taxes 240 364 350 24 Income tax expense 71 109 104 25 Net income S S 169 $ 255 S 246 26 27 Dividends paid S S 125 S 125 S 100 28 The following schedule shows the sales revenue and components of costs of goods sold for each of 29 ABC's two products. 30 31 SCHEDULES OF GROSS PROFIT ($000's) 32 Years ended December 31 2017 2016 2015 33 Drones 34 Sales S 4.880 $ 4,932 $ 4,791 35 Cost of goods sold: 36 Materials 1,895 1,835 1,781 37 Labor 1,103 1,074 1,043 38 Overhead 689 664 662 39 Standard cost variances 3 5 40 Depreciation 50 70 68 41 3,740 3,648 3,550 42 Gross Profit S 1,140 S 1.284 S 1,241 43 44 Cattle Prods 45 Sales S 2.870 S 2,781 S 2,702 46 Cost of goods sold: 47 Materials 888 868 840 48 Labor 537 532 505 49 Overhead 301 276 270 50 Standard cost variances (2) (3) 2 51 Depreciation 41 60 58 52 1.765 1,733 1,675 53 Gross Profit $ 1.105 S 1,048 S 1,027 54 55 $ (70) 738 4 10 11 56 57 BALANCE SHEETS (S000's) 58 December 31 2017 2016 2015 59 Cash 36 $ 165 $ 77 60 Accounts receivable 795 674 658 61 Allowance for Bad debt allowance (60) (60) 62 Inventories: 63 Raw materials (at cost) 322 304 286 64 Finished goods: (at standard) 65 Drones 913 710 66 Cattle Prods 405 390 374 67 Prepaid expenses 8 2 68 Current assets 2,409 2,213 2,049 69 Land 450 450 450 70 Building and equipment 1,865 1,858 1,831 71 Accumulated 1 depreciation (895) (790) (610) 72 Total assets $ 3,829 $ 3,731 $ 3,720 73 74 Accounts payable $ 837 $ 675 $ 694 75 Taxes payable 16 14 13 76 Accrued interest 77 Warranty liability 40 40 40 78 Current portion of long-term debt 100 100 100 79 Current liabilities 993 839 858 80 Long-term debt 1,300 1,400 1,500 81 Total liabilities 2,293 2.239 2,358 82 Paid-in-capital 550 550 550 83 Retained earnings 986 942 812 84 Total stockholders'equity 1,536 1,492 1,362 85 Total liabilities and equity 3,829 $ 3,731 $ 3,720 86 87 Required: You are in the Planning phase of the audit. The engagement partner has asked you to perform analytical procedures to identify potential risks and areas of audit focus in ABC Inc's 2017 financial statements. Perform the following analytical procedures on the financial statements and identify issues that you believe require special attention in the 88 2017 audit. 89 90 91 3.) Compute the ratios included on the KPI Ratio Listing for 2017 and 2016. 92 Determine if there are ratios that you should investigate and indicate the potential 93 causes of these ratio changes. 94 95 96 97 $ 2017 2016 Change F/U?? Yes or No. If yes, what is Cause/Trend to investigate 3 4 1.) Current Ratio 6 Current Assets/Current Liabilities 7 8 2.) Working Capital 9 Current Assets - Current Liabilites 10 11 3.) Earnings Per Share 12 (Net Income - Preferred Dividends) / Avg. Common Shares Outstanding 13 14 4.) Gross Profit % (Overall) 15 Gross Profit/ Net Sales 16 17 4.a.) Gross Profit % (Drones) 18 Gross Profit / Net Sales 19 20 4.b.) Gross Profit % (Cattle Prods) 21 Gross Profit / Net Sales 22 23 5.) Inventory Turnover (Overall) 24 Cost of Goods Sold / Avg. Inventory 25 26 5.a.) Inventory Turnover (Drones) 27 Cost of Goods Sold / Ave. Inventory 28 29 5.b.) Inventory Turnover (Cattle Prods) 30 Cost of Goods Sold / Avg. Inventory 31 32 6.) Days in Inventory (Overall) 33 365 / Inventory Turnover 34 35 6.a.) Days in Inventory (Drones) 36 365 / Inventory Turnover 37 38 6.b.) Days in Inventory (Cattle Prods) 39 365 / Inventory Turnover 40 41 7.) Accounts Receivable Turnover 42 Net Credit Sales / Ave, Accounts Receivable 43 44 8.) Ave, Collection Period 45 365 / Accounts Receivable Turnover 46 47 9.) Return on Assets 48 Net Income / Avg Total Assets 49 50 10.) Times Interest Earned 51 (Net Income + Interest Expense + Income Tax Expense) / Interest Expense 52 53