Statements of Financial Position As of 6/30/2005, 2004 and 2003 (In Thousands) June 30. 2005 June 30. 2004 June 30. 2003 $ 2,388 $ 1,695 $ 453 Current assets: Cash and cash equivalents Accounts receivable, net of allowance for doubtful accounts of $56; $171; and $105 June 30, 2005, 2004; and 2003, respectively Inventories Current portion of notes receivable Deferred income taxes Other current assets 5,592 9,434 2,681 211 1.157 3,432 5,034 1,592 209 971 2,094 3,266 622 299 552 21,463 Total current assets 7,286 12,933 6.940 183 Equipment and leasehold improvements, net Other assets Deferred income tax Intangible assets 910 167 126 251 600 163 34 252 222 274 Total assets $ 29,082 $ 8,335 $ 14,387 $ Current Liabilities: Notes payable Current portion of long-term obligations under capital leases Accounts payable and accrued expenses Income taxes payable $ 1,625 136 5,862 614 1,328 103 3,871 591 $ 1,021 95 2,307 86 Total current liabilities 8,237 3,509 5,893 161 79 Long-term obligations under capital leases Deferred income taxes 367 242 Stockholders' equity: Common Stock Additional paid-in capital Retained earnings 183 14,213 5,840 56 7,086 1,191 37 3,810 900 20,236 8,333 4,747 Total stockholders' equity $ 29,082 $ 14,387 $ 8,335 Total liabilities and stockholders' equity Statements of Income For the Periods Ending 6/30/2005, 2004 and 2003 fin Thousands) 2005 2009 Sales Cost of Goods Sold Gross Margin $ 18,84 10,598 8,250 $ 12,445 6,833 5,612 $ 8,213 4,523 3,690 General & Administrative Expenses Research & Development Costs 967 149 3,366 1,335 1,899 695 914 906 Income from Operations Net Interest Expense Loss on Sale on Receivables, factored 7,134 247 77 Income Before Income Taxes Provision for Income Taxes 6,917 2,258 847 556 668 284 Net Income $ 4,649 $ 291 $ 384 Schedule of Equipment and Leasehold Improvements ann Beginning Balance Additions Retirements Ending Balance Equipment Leasehold Improvements 626,510 143,421 131,440 15,565 16,610 741,340 158,986 769,931 147,005 16,610 900,326 2004 Beginning Balance Ending Balance Additions Retirements Equipment Leasehold Improvements 40,602 741,340 158,986 396,790 46,885 1,097,528 205,871 900,326 443,675 40,602 1,303,399 2005 baginning Balance Additions Retirements Cricing Balance Equipment Leasehold Improvements 125,864 1,097,528 205,871 6,953,306 135,642 7,924,970 341,513 1,303,399 7,088,948 125,864 8,266,483 Depreciation Schedule Beginning Balance Additions Retirements Ending Balance Equipment Leasehold Improvements 185,696 24,668 14,500 84,325 19,768 255,521 44,436 210,364 104,093 14,500 299,957 2004 Beginning Balance Ending Balance Additions Retirements Equipment Leasehold Improvements 255,521 44,436 105,718 23,144 35,101 326,138 67,580 299,957 128,862 35,101 393,718 2005 Beginning Balance Enging Balance Additions Retirements Equipment Leasehold Improvements 326,138 67,580 1,024,587 17,828 109,875 1,240,850 85,408 393,718 1,042,415 109,875 1,326,258 1. Prepare a Vertical and Horizontal Analysis of both the Balance Sheet and Income Statement 2. Based on the results of question #1, which accounts appear to be out of alignment? Provide a brief analysis of the relationships between the related accounts. 3. You have been provided with the "Schedule of Equipment and Leasehold Improvements" and the "Depreciation Schedule". Analyze the reasonableness of the Depreciation Expense for each fixed asset category on a yearly basis and explain your findings. 4. Based on your conclusions to question #3 regarding equipment, what fraud scheme(s) might be causing this activity? What additional procedures might you perform to investigate these possible frauds? 5. Based on your conclusions to question #3 regarding leasehold improvements, what fraud scheme(s) might be causing this activity? What additional procedures might you perform to investigate these possible frauds? 6. Does the relationship between "Accounts Receivable" and "Allowance for Doubtful Accounts" appear reasonable? Why or Why not? Statements of Financial Position As of 6/30/2005, 2004 and 2003 (In Thousands) June 30. 2005 June 30. 2004 June 30. 2003 $ 2,388 $ 1,695 $ 453 Current assets: Cash and cash equivalents Accounts receivable, net of allowance for doubtful accounts of $56; $171; and $105 June 30, 2005, 2004; and 2003, respectively Inventories Current portion of notes receivable Deferred income taxes Other current assets 5,592 9,434 2,681 211 1.157 3,432 5,034 1,592 209 971 2,094 3,266 622 299 552 21,463 Total current assets 7,286 12,933 6.940 183 Equipment and leasehold improvements, net Other assets Deferred income tax Intangible assets 910 167 126 251 600 163 34 252 222 274 Total assets $ 29,082 $ 8,335 $ 14,387 $ Current Liabilities: Notes payable Current portion of long-term obligations under capital leases Accounts payable and accrued expenses Income taxes payable $ 1,625 136 5,862 614 1,328 103 3,871 591 $ 1,021 95 2,307 86 Total current liabilities 8,237 3,509 5,893 161 79 Long-term obligations under capital leases Deferred income taxes 367 242 Stockholders' equity: Common Stock Additional paid-in capital Retained earnings 183 14,213 5,840 56 7,086 1,191 37 3,810 900 20,236 8,333 4,747 Total stockholders' equity $ 29,082 $ 14,387 $ 8,335 Total liabilities and stockholders' equity Statements of Income For the Periods Ending 6/30/2005, 2004 and 2003 fin Thousands) 2005 2009 Sales Cost of Goods Sold Gross Margin $ 18,84 10,598 8,250 $ 12,445 6,833 5,612 $ 8,213 4,523 3,690 General & Administrative Expenses Research & Development Costs 967 149 3,366 1,335 1,899 695 914 906 Income from Operations Net Interest Expense Loss on Sale on Receivables, factored 7,134 247 77 Income Before Income Taxes Provision for Income Taxes 6,917 2,258 847 556 668 284 Net Income $ 4,649 $ 291 $ 384 Schedule of Equipment and Leasehold Improvements ann Beginning Balance Additions Retirements Ending Balance Equipment Leasehold Improvements 626,510 143,421 131,440 15,565 16,610 741,340 158,986 769,931 147,005 16,610 900,326 2004 Beginning Balance Ending Balance Additions Retirements Equipment Leasehold Improvements 40,602 741,340 158,986 396,790 46,885 1,097,528 205,871 900,326 443,675 40,602 1,303,399 2005 baginning Balance Additions Retirements Cricing Balance Equipment Leasehold Improvements 125,864 1,097,528 205,871 6,953,306 135,642 7,924,970 341,513 1,303,399 7,088,948 125,864 8,266,483 Depreciation Schedule Beginning Balance Additions Retirements Ending Balance Equipment Leasehold Improvements 185,696 24,668 14,500 84,325 19,768 255,521 44,436 210,364 104,093 14,500 299,957 2004 Beginning Balance Ending Balance Additions Retirements Equipment Leasehold Improvements 255,521 44,436 105,718 23,144 35,101 326,138 67,580 299,957 128,862 35,101 393,718 2005 Beginning Balance Enging Balance Additions Retirements Equipment Leasehold Improvements 326,138 67,580 1,024,587 17,828 109,875 1,240,850 85,408 393,718 1,042,415 109,875 1,326,258 1. Prepare a Vertical and Horizontal Analysis of both the Balance Sheet and Income Statement 2. Based on the results of question #1, which accounts appear to be out of alignment? Provide a brief analysis of the relationships between the related accounts. 3. You have been provided with the "Schedule of Equipment and Leasehold Improvements" and the "Depreciation Schedule". Analyze the reasonableness of the Depreciation Expense for each fixed asset category on a yearly basis and explain your findings. 4. Based on your conclusions to question #3 regarding equipment, what fraud scheme(s) might be causing this activity? What additional procedures might you perform to investigate these possible frauds? 5. Based on your conclusions to question #3 regarding leasehold improvements, what fraud scheme(s) might be causing this activity? What additional procedures might you perform to investigate these possible frauds? 6. Does the relationship between "Accounts Receivable" and "Allowance for Doubtful Accounts" appear reasonable? Why or Why not