Oak Industries, Inc is a manufacturer of radio and cable TV equipment. It also operates subscription TV systems. At one time Oak had a military contract, the loss of which was not disclosed in the financial statements. The government, subject to a customs duty audit, is claiming $4 million due it. Oak officials have had a target earnings per share amount of $.25 per share.

The financial statements, without footnotes, are included in the following two pages. Using the financial information available and the information above, answer the following questions:

1) Prepare a vertical analysis for both the balance sheet and the statement of income

2) Prepare a horizontal analysis for both the balance sheet and the statement of income

3) What ratios might be of some use in analyzing these financial statements?

4) Using the ratios identified in #3 above, what trends appear to be out of line?

5) Other than failure to disclose the loss of the government contract, can you identify any potential fraudulent, misleading or omitted information from your analysis in number 1-4 above?

6) If your answer to #5 is yes, can you quantify the amount of the potential misstatement?

Oak Industries, Inc

Unaudited consolidated Financial Statements

(000s Omitted)

Balance Sheet

Balance Sheet	12/31/X1	12/31/X2
ASSETS
Cash	$10,304	$12,683
Marketable Securities	66,676	33,235
Accounts Receivable	104,953	131,017
Inventories	106,569	127,305
Prepaid Income Taxes	10,762	24,461
Total Current Assets	299,264	328,701
Fixed Assets	248,991	277,493
Accumulated Depreciation	(70,640)	(99,789)
Notes Receivable	10,983	13,368
Intangible Assets (net)	78,918	57,946
Investments	27,323	34,164
Other Assets	14,480	24,297
	310,055	307,479
Total Assets Liabilities & equity	$609,319	$636,180
Notes Payable	$70,758	$8,846
Accounts Payable	35,053	31,430
Accrued Liabilities	47,765	54,857
Current Portion LTD	8,889	5,391
Subscriber Deposits	17,502	15,378
Total Current Liabilities	179,967	115,902
Long-Term Debt	141,744	238,417
Other L/T Liabilities	25,325	27,746
	167,069	266,163
Common Stock	16.363	16,402
Preferred Stock	72	54
Capital Surplus	158,890	159,281
Retained Earnings	89,761	89,932
Currency Adjustments	(2,757)	(11,521)
Treasury Stock	(46)	(33)
Total Liabilities & Equity	$609,319	$636,180

Statement of Income

Statement of Income	12/31/X1	12/31/X2
Net Sales	$507,119	$545,720
Cost of Goods Sold	338,682	410,209
Gross Margin	168,437	135,511
General Expenses	107,707	125,982
Operation Income	60,730	9,529
Other Income	15,944	10,659
Interest Expense	25,430	30,170
Minority Interests	8,986	3,075
Income Taxes (Benefit)	11,908	(17,160)
	(30,380)	(5,426)
Net Income	$30,350	$4,103
Earnings Per Share	$2.01	$0.25