Legion Appliance Manufacturing Company has been your firm?s audit client for the past five years. Approximately four years ago Legion developed a better toaster than had been available and sales took off, especially during the most recent two years, 2014 and 2015. Currently, the company controls approximately 25 percent of the toaster market in the United States. In addition, the company manufactures other products, including vacuum cleaners, floor polishers, and electric fondue pots.

Much of the increased sales performance is due to Michael Sinclair, who became the chief executive officer in 2011. Michael and several other officers were able to accomplish a leveraged stock buyout in 2013. This seems to have worked out very well since Michael suggests that his net worth grew from less than $300,000 to well over $5 million due to increases in the value of the common stock he holds in the company. He is also excited since the company?s unaudited results show earnings per share of $1.21, one cent more than the most optimistic analysts had projected. He points out to you that sales are up over 38 percent compared to the previous year and net income has increased by 54 percent. All is well.

You are beginning the planning analytical procedures for the 2015 audit to obtain information to help plan the nature, timing, and extent of other audit procedures.

• Using the Legion Analytical Review workpaper prepare a vertical analysis of the financial statements for all years (Round to the nearest percentage, i.e., 5%).
• Using the Legion Analytical Review workpaper prepare a horizontal analysis of the financial statements comparing 2013 to 2014 and 2014 to 2015 (Round to the nearest percentage, i.e. 5%).
• Using the Legion Analytical Review workpaper prepare the following ratios for each year (Round to the nearest .0; i.e. 2.5). Show the formula used for each ratio.

Current

Quick

Receivable turnover (A/R balance at 12/31/12 = $14,471)

Days? sales in ending receivables

Inventory turnover (Inventory balance at 12/31/12 = $9,903)

Days? sales in ending inventory

Interest expense/Debt

• Use the information from your analysis to identify areas/accounts that may represent specific risks relevant to this year?s audit (uses the Planning Risks workpaper). For each area/account provide a justification for why you believe it represents a risk.

Legion Appliance Manufacturing Company Planning Analytical Review Prepared by ______________ Reviewed by _____________ Balance Sheet Dollars (000s omitted) 12/31/2013 12/31/2014 12/31/2015 (Audited) (Audited) (Unaudited) Assets Cash Accounts Receivable Inventories - RM Inventories - WIP Inventories - FG Total Inventories Other Current Assets Total Current Assets Fixed Assets (net) Total Assets 63 14,402 2,682 491 6,589 9,762 708 24,935 18,267 43,202 514 27,801 9,182 638 9,757 19,577 1,449 49,341 15,900 65,241 7,344 3,127 2,707 1,554 14,732 14,800 685 30,217 7,775 5,210 43,202 15,072 5,468 900 2,619 24,059 19,841 1,254 45,154 7,775 12,312 65,241 Horizontal Analysis 2013 vs 2014 2014 vs 2015 (Audited) (Unaudited) Vertical Analysis 12/31/2013 12/31/2014 12/31/2015 (Audited) (Audited) (Unaudited) Horizontal Analysis 2013 vs 2014 2014 vs 2015 (Audited) (Unaudited) 885 51,076 18,049 4,151 16,935 39,135 3,015 94,111 24,029 118,140 Liability and Equity Accounts Payable Accrued Liabilities Current Portion L/T Debt Income Tax Payable Total Current Liabilities Bank Debt Deferred income Taxes Total Liabilities Common Stock Retained Earnings Total Liabilities and Equity Vertical Analysis 12/31/2013 12/31/2014 12/31/2015 (Audited) (Audited) (Unaudited) 13,288 4,710 1,250 3,782 23,030 62,057 1,881 86,968 7,903 23,269 118,140 Income Statement Dollars (000s omitted) 12/31/2013 12/31/2014 12/31/2015 (Audited) (Audited) (Unaudited) Gross Sales 78,428 133,504 183,767 Less: Returns & allow. 2,284 5,270 2,644 Net Sales 76,144 128,234 181,123 Cost of Goods Sold 46,213 70,756 94,934 Gross Margin 29,931 57,478 86,189 Sell, Advertising, R&D expenses 20,105 42,600 64,285 Income from operations 9,826 14,878 21,904 Interrest expense 1,930 1,584 3,189 Income before taxes 7,896 13,294 18,715 Income Taxes 3,807 6,189 7,761 Net Income 4,089 7,105 10,954 EPS 0.46 0.78 1.21 Ratios Current Quick Receivable Turnover Days' sales in ending receivables Inventory Turnover Days' sales in ending inventory Interest expense/debt Ratio Formula Used: Current Quick Receivable Turnover Days' sales in ending receivables Inventory Turnover Days' sales in ending inventory Interest expense/debt