(Problem 6C-4)

you will recalculate the analytical review ratios for the Keystone Computers & Networks. The working paper on page 272 shows the ratios prepared by the auditors. Use this working paper as a reference to perform the following procedures:

1. Use the worksheet on page 2 to recalculate the ratios for 12/31/X5. Refer to the Working Trial Balance on pages 270-271 to calculate the ratios. Show your work & the results below:

Keystone Computers & Networks, Inc.

Analytical Review Ratios For the Period Ended December 31, 20X5

	12/31/X5	12/31/X4	Industry
Current Ratio	1.144	1.215	1.300
Days' Sales in Accounts Receivable, Computed with Average Accounts Receivable	37.0	33.2	37.000
Allowance for Doubtful Accounts / Accounts Receivable	1.0%	1.1%	------
Bad Debt Expense / Net Sales	0.3%	0.2%	------
Total Liabilities to Net Worth	3.5%	2.7	2.900
Return on Total Assets	1.7%	8.3%	9.0%
Return on Net Worth	7.5%	30.5%	29.0%
Return on Net Sales	0.2%	1.0%	2.3%
Gross Profit / Net Sales	22.1%	23.2%	24.0%
Selling, Operating and Administrative Expense	21.2%	21.4%	23.9%
Times Interest Earned	1.7	4.1	5.5

2. After completing part (a), review the ratios and identify below the financial statement accounts that should be investigated because the related ratios are not comparable to prior-year ratios, industry averages, or your knowledge of the company.
3. For each account identified in part (b), list potential reasons for the unexpected account balances and related ratios.

Case 6C-4 Details of Computations of 20X5 ratios

Current Ratio	Current Assets / Current Liabilities $11,845,852/$10,352,563= 1.144
Days Sales in A/R Computed with Average A/R	Sales per day = Sales / 365 = $92,586,051/365= $253,660 Average A/R = (Beg. A/R + End A/R) / 2 = $9,384,991 Days sales = Average A/R / Sales per day = $9,384,991/$253,660= $36.99
Allowance for Bad Debts / A/R	$104,000/$10,253,457= 0.10
Bad Debts Expense / Net Sales	$256,678/$92,586,051= 0.003
Inventory Turnover Computed with Average Inventory	Average Inv. = (Beg. Inv. + End Inv) / 2 = Inv. Turnover = Cost of Goods Sold / Average Inv. =
Days Inventory Computed with Average Inventory	CGS per day = Cost of Goods Sold / 365 = Days Inv. = Average Inv. / CGS per day =
Total Liabilities to Net Worth	Total Liabilities / Stockholders' Equity
Return on Total Assets	Net Income / Total Assets
Return on Net Worth	Net Income / Stockholders' Equity
Return on Net Sales	Net Income / Net Sales
Gross Profit / Net Sales	Gross Profit / Net Sales
Selling, Operating and Admin. Expense / Net Sales	Selling, Operating and Admin. Exp. / Net Sales
Times Interest Earned	Operating Income / Interest Expense