*****Review EarthWear's unaudited 2019 financial statements including the "Balance Sheet", "Income Statement", and "Cash Flow" worksheets to obtain a better understanding of the client and to assess its current financial condition. A senior auditor from your firm has already calculated some financial and industry ratios to help with the continuance decision. Compare EarthWear's ratios to the industry ratios provided on the "Ratios" worksheet. Pay particular attention to items that might be helpful in determining whether or not to continue with EarthWear as an audit client. Review the client acceptance/continuance forms, which have already been completed. Complete the remaining questions on Work Paper 3-5

****BACKGROUND INFORMATION*****

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While the content of this document is very similar to information found on the EarthWear and Willis & Adams, CPAs websites, it contains specific content related to the 2019 audit. This information is applicable to all EarthWear Mini-cases.

Background of EarthWear

EarthWear Clothiers was founded in Boise, Idaho, by James Williams and Calvin Rogers in 1973 to make high-quality clothing for outdoor sports, such as hiking, skiing, fly-fishing, and whitewater kayaking. Over the years, the company's product lines have grown to include casual clothing, accessories, shoes, and soft luggage. EarthWear offers its products through three retailing options: catalogs, retail outlets, and its website.

When EarthWear founders, Williams and Rogers, decided to incorporate their company in 1975, they searched for an accounting firm to conduct the company's approaching year-end audit.They were referred to a bright, young auditor that had recently started his own CPA firm, Michael Willis.Williams and Rogers were immediately impressed with Mr. Willis, and agreed to have Willis and Company complete EarthWear's upcoming audit.Ever since, EarthWear and Willis and Adams have had a strong relationship.EarthWear decided to go public in 1986. Although Willis and Adams audited very few other public companies at that time, EarthWear retained Willis and Adams as the company's auditor.

Outdoor Clothing Industry

Over the past several years, the outdoor clothing industry has been growing at a steady, moderate pace.The industry consists of a wide variety of manufacturers that sell products directly to customers or through retail stores, including department stores, specialty shops, and catalog companies.The industry is highly competitive.EarthWear's direct competitors include Eddie Bauer, Land's End, L. L. Bean, Patagonia, and Timberland.EarthWear competes primarily on merchandise value (quality and price), its established customer list, and customer service, including fast order fulfillment and unqualified guarantees.

Management

In late February of 2019, EarthWear's chief accounting officer/controller Brad Norton unexpectedly left the company to take a job with another clothes manufacturer.Mr. Norton had been with the company since 2007.In those ten years, the auditors from Willis and Adams had enjoyed their work association with Mr. Norton.They found him to be a strong leader with a great deal of personal character.Mr. Norton cited "personal reasons" for his sudden departure from the company.A new controller, Carol McKay, was selected in November.Before her promotion, Ms. McKay had been the VP of External Reporting.In her 14 years with EarthWear, Ms. McKay spent the majority of her time in External Reporting.As a result, some executives questioned if Ms. McKay had the broad skill-set needed for such a demanding position.After interacting with her during some recent meetings, even some of Willis and Adams' professionals questioned Ms. McKay's qualifications for the job.

Accounting and Control Systems

With the complexity of EarthWear's customer database reaching 21.1 million people, and sales occurring through catalogs, retail outlets, and the internet, the company realized in early 2018 that it was in need of a new, upgraded accounting information system. The company switched to a new, integrated central accounting system in early 2019.The transition to the new system was overseen and implemented by the former controller, Brad Norton.This new system maintains integrated inventory, accounts receivable, payroll, and general ledger software modules.Although the implementation of the new system was expensive and laden with problems, by the 3rd and 4th quarters of 2019 the problems were largely resolved and the company began to see the benefits.The new system integrates the company's operations and accounting systems and allows EarthWear's sales force to promise next day delivery to telephone and internet customers.As a result, customer satisfaction has increased.

QUESTIONS

1.Have any situations been noted that bear on the integrity of management?

2.Is there evidence that the business is financially distressed?

3.Are there any internal conditions or trends that may raise concern, such as management turnover or new accounting information systems?

4.Are there any other risk concerns arising out of the information gathering process?

5.Overall risk assessment of the client. Would you Retain or Dismiss and why?

DJ EARTHWEARCASE@ Q Search Sheet Home Insert Page Layout Formulas Data Review View '+ Share Cut Arial Narrow 10 A- A 2 AutoSum Wrap Text Text AP. Copy Fill Paste Merge & Center $ ~ % 2 60 .0 Conditional Format Cell Insert Delete Format Sort & Format Formatting as Table Styles Clear Filter * Office Update To keep up-to-date with security updates, fixes, and improvements, choose Check for Updates. Check for Updates G2 X V fx 3-1 A B C D E F G H J K L M N 0 P Q R S T U v w EARTHWEAR CLOTHIERS 3-1 Client Continuance Evaluation SAA December 31, 2019 1/3/2020 NOTE TO STUDENTS: General This work paper is already complete, you should review its contents to Legal Name: EarthWear Clothiers, Inc. Fiscal year-end (MM/DD): 12/31 understand the components of the Address: 2635 N. Devlin Ave. client continuance process. City: Boise State: ID Zip 79443 Telephone: (208) 555-3242 Fax: (208) 555-3241 Country: United States 12 Entity Type: _Corporation Nature of Business: EarthWear produces high-quality clothing for outdoor sports, such as hiking, skiing, fly-fishing, and whitewater kayaking. Over the years, the company's product lines have grown to include casual clothing, accessories, shoes, and soft luggage. EarthWear offers its products 14 through three retailing options: catalogs, retail outlets, and its website. 15 Services Required: Integrated Audit 16 Public: Yes Ticker Symbol: EWCC Exchange: NASDAQ 17 Revenue (000's): $1,019,890 Assets (000's): $389.428 Net Worth (000's): $260,466 18 Estimated net fees: $865,000 19 Bud. audit hrs @ std rate: $962.500 20 Realization: 89.87% Net Revenue per hour: $232 21 Describe proposed fee arrangements: 22 Fixed fee arrangement 23 Timing of services to be performed: Peak 24 25 26 @ The McGraw Hill Companies, Inc., 2019 27 28 29 30 31 32 33 34 47 Instructions Work Paper 3-1 Work Paper 3-2 Work Paper 3-3 Work Paper 3-4 Work Paper 3-5 Balance Sheet |Income Statement Cash Flow Ratios + Ready + 100%DJ EARTHWEARCASE@ Q Search Sheet Home Insert Page Layout Formulas Data Review View '+ Share Cut 2 AutoSum Arial Narrow 10 A- A Wrap Text Text AP. Copy Fill Paste Merge & Center $ ~ % 2 00 .0 Conditional Format Cell Insert Delete Format Sort & Format Formatting as Table Styles Clear Filter * Office Update To keep up-to-date with security updates, fixes, and improvements, choose Check for Updates. Check for Updates G2 X V fx 3-2 A B C D E F G H K L M N 0 P Q R S T U V W EARTHWEAR CLOTHIERS 3-2 Client Continuance Evaluation SAA December 31, 2019 1/3/2020 NOTE TO STUDENTS: Other Characteristics This work paper is already complete, you should review its contents to Sub-prime lending operations: understand the components of the client continuance process. Select type of operation: A division of a regulated financial institution No A commercial entity that sells all loans it originates 15 A commercial entity that retains all or a portion of the loans it originates 16 17 Select all that are applicable: 18 19 Company plans to go public or raise significant equity? 20 Does the company intend to go public using a "back-door" registration? 23 Contingent fee arrangement? 24 25 Insured depository or institution? 26 27 Is the institution subject to a cease and desist order? 28 29 Has the institution entered into a memorandum of understanding with a regulatory agency? 30 31 Insurance company (life, property, and casualty)? 33 Public entity and local government risk pools? Government securities dealers? 36 37 Internet companies engaged in morally questionable activities? 38 Unregulated casinos? Entity that is an agency or subdivision of the Federal government, entity receiving substantial Federal funding No 41 or grants, or one subject to the Single Audit Act (excluding local governmental entities)? 42 43 44 @ The McGraw Hil Companies, Inc, 2019 45 Instructions Work Paper 3-1 Work Paper 3-2 Work Paper 3-3 Work Paper 3-4 Work Paper 3-5 Balance Sheet |Income Statement Cash Flow Ratios + Ready + 100%DJ EARTHWEARCASE@ Q Search Sheet Home Insert Page Layout Formulas Data Review View '+ Share Cut Arial Narrow 10 A- A Wrap Text Text 2 AutoSum AP. Copy Fill Paste Merge & Center $ ~ % 2 00 .0 Conditional Format Cell Insert Delete Format Sort & Format Formatting as Table Styles Clear Filter * Office Update To keep up-to-date with security updates, fixes, and improvements, choose Check for Updates. Check for Updates 12 X V fx 3-3 A B D E F G H K M N P Q R S T U V w X EARTHWEAR CLOTHIERS 3-3 Client Continuance Evaluation SAA December 31, 2019 1/3/2020 NOTE TO STUDENTS: This work paper is already complete, Management you should review its contents to understand the components of the Board of Directors Ownership Background client continuan Title: Name: Home City: Home State: Verification: Chairman James G. Williams Boise ID 25 Yes 11 Audit Comm. Chair Gary Amble Boise ID Yes 12 13 14 15 16 17 Key Management 18 CEO Calvin J. Rogers Boise 19 ID CFO James C. ("JC") Watts Boise Yes 20 Accounting Officer Carol Mckay Boise 21 23 Outside Advisors 27 Primary Law Firm Primary Banking Relationship 28 Name: Leon, Leon & Dalton Name: First National Bank 29 Address: 958 S.W. 77th Avenue Address: P.O. Box 1947 30 Boise, ID 79443 Boise, ID 79443 31 32 Telephone: (208) 525-6119 Telephone: (208) 543-5678 33 Contact: David Leon Contact: J Harmner 35 Underwriters Other Advisor 36 Name: Name: Felix & Waller 37 Address Relationship: WebTrust Assurance Auditor 38 Address: 5055 E Broadway Blvd 39 Tucson, AZ 85711 40 Telephone: Telephone: (520) 747-7755 41 Contact: Contact: Richard Waller 42 43 Service Team 44 Engagement Partner: Michael J. Willis 45 Engagement Partner Email: mjwillis@willisandadams.com 46 Engagement Partner Telephone: (208) 545-6776 47 Office: Boise 48 Senior Manager or Manager: Dianne R. Morris Engagement Quality Review Partner: Karen Mitchell Instructions Work Paper 3-1 Work Paper 3-2 Work Paper 3-3 Work Paper 3-4 Work Paper 3-5 Balance Sheet Income Statement Cash Flow Ratios + Ready + 100%DJ EARTHWEARCASE@ Q Search Sheet Home Insert Page Layout Formulas Data Review View '+ Share Cut Arial Narrow 10 A- A Wrap Text Text 2 AutoSum AP. Copy Fill Paste Conditional Format Cell Insert Delete Format Sort & Format Merge & Center $ ~ % 2 00 .0 Formatting as Table Styles Clear Filter * Office Update To keep up-to-date with security updates, fixes, and improvements, choose Check for Updates. Check for Updates G2 X V fx 3-4 A B C D E F G H K L M N 0 P Q R S T U V W EARTHWEAR CLOTHIERS 3-4 Client Continuance Evaluation SAA December 31, 2019 1/3/2020 NOTE TO STUDENTS: This work paper is already complete, Background Investigation Overview view its contents to understand the components of the The Firm requires background investigations for all clients. Subjects of the background investigations include the clients and key decision makers. Key decision makers are normally the company's board and client continuance process. audit committee (if applicable) chairs, chief executive officer, chief financial officer and principal accounting officer, but should also include significant principal investors, shareholders or others who exercise significant influence over company operations. Significant company related entities and/or subsidiaries should also be considered as additional subjects. Select from the following: All individuals/entities discussed above have been investigated. Yes Background investigations have taken place for any newly hired key decision makers. Yes 16 A thorough background investigation has been completed. Yes 18 Summarize the results of the investigation below: In 1909, EarthWear's vice president of finance, Don Evans, was charged with a misdemeanor involving illegal gambling on local college basketball games. Charges were later dropped in return for Mr. Evans agreeing to pay a fine of $750 and perform 50 hours of community service. No other illegal or ethical 20 problems were found with any other EarthWear executive. The McGraw-Hill Companies, Inc., 2019 24 25 26 28 Instructions Work Paper 3-1 Work Paper 3-2 Work Paper 3-3 Work Paper 3-4 Work Paper 3-5 Balance Sheet |Income Statement Cash Flow Ratios + Ready + 100%DJ EARTHWEARCASE@ Q Search Sheet Home Insert Page Layout Formulas Data Review View '+ Share Cut Arial Narrow 10 A- A Wrap Text General 2 AutoSum Copy Fill Paste Format KEE Merge & Center $ ~ % 2 00 $.0 Conditional Format Cell Insert Delete Format Sort & Formatting as Table Styles Clear Filter Office Update To keep up-to-date with security updates, fixes, and improvements, choose Check for Updates. Check for Updates D27 X V fx Yes A B C DE F G H J K L M N 0 P Q R S EARTHWEAR CLOTHIERS 3-5 Client Continuance Evaluation DJ December 31, 2019 7/18/21 General Risk Indicators Instructions: Evaluate and answer the following unanswered questions regarding the risk of retaining EarthWear as an audit client. Click on the If you selected "Yes' on any of the questions to the left, provide and explanation yellow boxes and select either "Yes" or "No" from the drop down menu. below: CO - Are there any concerns about undue reliance being placed on the results of our 9 No 10 work? (i.e. sale of the company, financing) Does the client have any associated entities that are not audited or are being audited by firms outside of Willis and Adams? No 12 Have any situations been noted that bear on the integrity of management? Yes Please provide a brief explanation here 15 16 Is there evidence that the business is financially distressed? Please select an answer from the drop down menu in the cell on the lef 17 Is the client imposing on us any unreasonable scope or timing restrictions? No s the client's industry or business characterized by significant operating, economic, product, of other commercial risk? (Examples of such risks include: No development or start-up stage, high risk industry, an industry with relatively short 19 product lives, or product(s) of unknown or doubtful commercial feasibility.) 20 Are there any pending enforcement matters or other investigations the outcome of which could adversely impact the viability or reputation of the business? No 21 Has the information gathering process raised concerns about: unusual of contentious accounting policies, auditing procedures, internal controls, reporting, No 23 proper accounting records, tax or regulatory matters? 24 Are there any external conditions or trends that may have a significant impact on the client, such as changes in buyers, changes in suppliers, or new competitors? No 25 26 Are there any internal conditions or trends that may raise concem, such as management turnover or new accounting information systems? Yes Please provide a brief explanation here 27 28 Are there any other risk concerns arising out of the information gathering 29 process? Please select an answer from the drop down menu in the cell on the left 30 31 Briefly explain your overall risk assessment of the client: 32 Overall risk assessment of the client: Please select an answer from the drop down menu in the cell on the left 33 34 Based on the information gathered, and the above evaluation of engagement continuation risk, recommend whether or not to have Willis and Adams continue to provide service to this client. Click on the yellow Instructions Work Paper 3-1 Work Paper 3-2 Work Paper 3-3 Work Paper 3-4 Work Paper 3-5 Balance Sheet Income Statement Cash Flow Ratios + Ready + 100%DJ EARTHWEARCASE@ Q Search Sheet Home Insert Page Layout Formulas Data Review View '+ Share Cut Arial Narrow 10 A- A Wrap Text General 2 AutoSum Copy Fill Paste Merge & Center $ ~ % 2 60 $.0 Conditional Format Cell Insert Delete Format Sort & Format Formatting as Table Styles Clear Filter * Office Update To keep up-to-date with security updates, fixes, and improvements, choose Check for Updates. Check for Updates E2 X V fx 1-1 B C D F G H J K L M N 0 P Q R S T EARTHWEAR CLOTHIERS 1-1 Consolidated Balance Sheets PBC (In thousands) 12/31/2019 December 21 2018 2017 Assets 2019 (unaudited) Current Assets: Cash and cash equivalents $79,359 $48.978 $49,668 Receivables, net $8,643 $12,875 $11,539 11 Inventory $147,693 $122,337 $105,425 Prepaid advertising $10.212 $11,45 $10,772 Other prepaid expenses $5,435 $6,315 $3,780 14 Deferred income tax benefits $10,33 $7,132 $6,930 15 Total current assets $261,680 $209,095 $188, 115 16 Property, plant and equipment, at cost 17 Land and buildings $76,560 $70,918 $66,804 18 Fixtures and equipment $68,632 $67,513 $66,876 19 Computer hardware and software $75,400 $64,986 $47,460 20 Leasehold improvements $3,144 $3,010 $2,894 1 Total property, plant and equipment $223,737 206,426 $184,040 22 Less - accumulated depreciation and amortization $97,722 85,986 $76,256 23 Property, plant and equipment, net :126,01 $120,440 $107,784 24 Intangibles, net $1,73 $423 $628 15 Total assets $389,42 $329,959 $296,527 26 27 Liabilities and shareholder's investment 28 29 Lines of credit $10,510 $11,011 $7,621 30 Accounts payable $54,186 $62,509 $48,43 31 Reserve for retums $6.100 $5.890 $5,115 32 Accrued liabilities $30,492 $26,738 $28,440 33 Accrued profit sharing $3,108 $1,532 $1,794 34 Income taxes payable $16,22 $8,588 $6.666 5 Total current liabilities $120,617 $116,268 98,067 36 Deferred income taxes $8,345 $9.469 $5,926 17 Shareholders' investment: 38 Common stock, 26,144 shares issued $261 $261 $261 39 Donated capital $5,460 $5,460 $5,460 40 Additional paid-in capital $25,719 $20,740 $19,311 41 Deferred compensation ($36) ($79) ($153) 42 Accumulated other comprehensive income $2,173 $3,883 $1,739 43 Retained earnings $361,402 $317,907 $295,390 44 Treasury stock, 6,654, 7,114, and 6,546 shares at cost, respectively $134,512) ($143,950) ($129.462) 45 Total shareholders' investment $260,467 $204.222 $192,535 46 Total liabilities and shareholders' investment $389,428 $329,959 $296,527 47 Instructions Work Paper 3-1 Work Paper 3-2 Work Paper 3-3 Work Paper 3-4 Work Paper 3-5 Balance Sheet Income Statement Cash Flow Ratios + Ready + 100%DJ EARTHWEARCASE@ Q Search Sheet Home Insert Page Layout Formulas Data Review View '+ Share Cut Arial Narrow 10 A- A General 2 AutoSum Wrap Text AP. Copy Fill Paste Merge & Center $ ~ % 2 60 .0 Conditional Format Cell Insert Delete Format Sort & Format Formatting as Table Styles Clear Filter * Office Update To keep up-to-date with security updates, fixes, and improvements, choose Check for Updates. Check for Updates E2 X V fx 1-2 C D F G H J K L M N P Q R S T U EARTHWEAR CLOTHIERS 1-2 Consolidated Statements of Operations PBC (In thousands, except per share data) 12/31/2019 For the period ended December 2018 2017 2019 (unaudited) Net Sales $1,019,890 $950,48 $857,885 Cost of sales $572,153 $546,393 $472,739 10 Gross Profit $447,737 $404,091 $385,146 11 Selling, general and administrative expenses $374,180 $364,012 334,994 12 Non-recurring charge (credit) ($1.153) 13 Income from operations $73,557 140,729 $51,305 14 Other income (expense): 15 Interest expense ($878 ($983) ($1,229) 16 Interest income $989 1,459 $57 17 Gain on sale of subsidiary 18 Other ($3.514 ($4,798 ($1,091) 19 Total other income (expense), net $3,40 ($4.322) ($1,747) 20 Income before income taxes $70,154 $35,757 $49,559 1 Income tax provision $26.658 $13,230 $18,337 22 Net income $43,495 $22,527 $31,222 23 Basic earnings per share 1.48 1.15 24 Diluted earnings per share 1.45 1.14 25 Basic weighted average shares outstanding 19,159 19,531 19,555 26 Diluted weighted average shares outstanding 19,485 19,774 20.055 27 28 29 @ The McGraw Hill Companies, Inc., 2019 30 31 32 33 34 35 36 39 Instructions Work Paper 3-1 Work Paper 3-2 Work Paper 3-3 Work Paper 3-4 Work Paper 3-5 Balance Sheet Income Statement Cash Flow Ratios + Ready + 100%DJ EARTHWEARCASE@ Q Search Sheet Home Insert Page Layout Formulas Data Review View '+ Share Cut 10 A- A 2 AutoSum Arial Narrow Wrap Text General AP. 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Check for Updates E2 X V fx 1-3 B C D F G H J K L M N P Q R S T EARTHWEAR CLOTHIERS 1-3 Consolidated Statements of Cash Flows PBC DOWN- (In thousands) 12/31/2019 For the period ended December 31 2018 2017 Cash flows from (used for) operating activities: 2019 (unaudited) Net income $43,495 $22,527 $31,222 Adjustments to reconcile net income to net cash flows from operating activities: 11 Non-recurring charge (credit) ($1,153) 12 Depreciation and amortization $17,515 $15,231 $13.465 13 Deferred compensation expense $4 $75 $103 14 Deferred income taxes ($4,330) 3,340 5,376 15 Pretax gain on sale of subsidiary 16 Loss on disposal of fixed assets $1,578 $284 17 Changes in assets and liabilities excluding 18 the effects of divestitures: 19 Receivables, net $4,232 $1,336) $2,165 20 Inventory ($25,356) $16,912) $37,370 21 Prepaid advertising $1.246 ($686) $3,110 22 Other prepaid expenses ($818) ($2,534) $1,152 23 Accounts payable ($8,323) $14,078 $ 8,718) 24 Reserve for retums $210 $775 $439 25 Accrued liabilities $5,502 ($709) $4,962) 26 Accrued profit sharing $1,576 ($262) $328 27 Income taxes payable $7,634 $1,923 ($2,810) 28 Tax benefit of stock options $4,979 $1,429 $1.765 29 Other ($1,404) $2.144 $437 30 Net cash from (used for) operating activities $47,778 39,367 $79,871 31 Cash flows from (used for) investing activities: 32 ash paid for capital additions $26,334) $28,959) ($18,208) 33 Proceeds from sale of subsidiary 34 Net cash flows used for investing activities ($26,334) ($28,959) ($18,208) 35 Cash flows from (used for) financing activities: 36 Proceeds from (payment of) short-term debt ($501) $3.390 $17,692) 37 Purchases of treasury stoc ($8,052) $18,192 ($2.935) Issuance of treasury stock $17,490 $3,704 $47317 39 Net cash flows used for financing activities $8,937 $11,097 16,310) 40 Net increase (decrease) in cash and cash equivalents :30,381 ($690 $45,352 11 Beginning cash and cash equivalents $48,978 $49,668 $4.317 42 Ending cash and cash equivalents $79,359 $48,978 $49,668 43 Supplemental cash flow disclosures: 44 Interest paid $878 $987 $1,229 45 Income taxes paid $21,431 $6.278 $13,701 46 47 Instructions Work Paper 3-1 Work Paper 3-2 Work Paper 3-3 Work Paper 3-4 Work Paper 3-5 Balance Sheet Income Statement Cash Flow Ratios + Ready + 100%DJ EARTHWEARCASE@ Q Search Sheet Home Insert Page Layout Formulas Data Review View '+ Share Cut Arial Narrow 10 A- A Wrap Text General 2 AutoSum AP. Copy Fill Paste Merge & Center $ ~ % 2 60 $.0 Conditional Format Cell Insert Delete Format Sort & Format Formatting as Table Styles Clear Filter * Office Update To keep up-to-date with security updates, fixes, and improvements, choose Check for Updates. Check for Updates K2 X V fx 5-1 B C D E F G H 1 J M N 0 P Q R S T U v EARTHWEAR CLOTHIERS 5-1 Ratio Analyses SAA December 31, 2019 1/3/2020 December 21 2015 2016 2017 2018 2015 2019 Difference Industry (Audited) (Audited) (Audited) (Audited) Expected Actual from unaudited) Average Difference Expected from 2019) CO- SHORT-TERM LIQUIDITY RATIOS: 9 Current Ratio.. 10 current assets / curren 11 Quick Ratio. ...0.62. 0.80. ....-0.05. 12 iquid assets / current liabilities 13 Operating Cash Flow Ratio NA NA 14 cash flow from operations / current liabilities 15 16 ACTIVITY RATIOS: 17 Receivables Tumove.. ...1.18.00.. .....MA. 18 net sales / net ending receivables 19 Days. Outstanding in Accounts Receivable.......... -1.74 20 365 days / receivables turnover 21 Inventory Turnover.. 3.43. -2.33 22 cost of sales / inventory 23 Days of Inventory on Hand.. 25.78 58.70 36.29 24 365 / (cost of sales / inventory) 25 26 PROFITABILITY / PERFORMANCE RATIOS: 27 Gross Profit Percentage.. ....43.9075... 28 gross profit / net sales 30 29 Profit Marg!.." ..3.30% 0.96% net income / net sales 31 Return on Assets.. 3.77%% 32 net income / total assets 33 Return on Equity 34 net income / total owners' equity 35 36 COVERAGE RATIOS: 37 Debt to Equity. 38 total liabilities / shareholders' investment 39 Times Interest Earned.. 40 (net income + interest expense) / interest expense 41 42 43 . Expected values are obtained by using the forecast function in Excel (using the row of data from 2017 and 2018 to obtain the expected value for 2019). 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