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Instructions (Problem 6C-4) For the first task of the Audit Case Review, you will recalculate the analytical review ratios for the Keystone Computers & Networks. The working paper on page 254 shows the ratios prepared by the auditors. Use this working paper as a reference to perform the following procedures: a. Use the worksheet on page 2 to recalculate the ratios for 12/31/X5. Refer to the Working Trial Balance on pages 252-253 to calculate the ratios. Show your work on the worksheet and insert the results below: Keystone Computers & Networks, Inc. Analytical Review Ratios For the Period Ended December 31, 20x5 12/31/XS 12/31/X4 Industry Current Ratio 1.215 1.300 Days' Sales in Accounts Receivable. Computed with Average Accounts Receivable 33.2 37.000 Allowance for Doubtful Accounts / Accounts 1.1% Receivable Bad Debt Expense / Net Sales 0.2% Total Liabilities to Net Worth 2.7 2.900 Return on Total Assets 8.3% 9.0% Return on Net Worth 30.5% 29.0% Return on Net Sales 1.0% 2.3% Gross Profit/Net Sales 23.2% 24.0% Selling, Operating and Administrative Expense 21.4% 23.9% Times Interest Earned 4.1 5.5 b. 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. c. For each account identified in part (b), list potential reasons for the unexpected account balances and related ratios. 1 Audit Case Review: Task 1 Worksheet Case 6C-4 Details of Computations of 20x5 ratios Current Ratio Current Assets Current Liabilities Sales per day Sales/365 Days Sales in A/R Computed with Average A/R Average A/R = (Beg. A/R + End A/R)/2 Days sales = Average A/R/Sales per day Allowance for Bad Debts/A/R Bad Debts Expense / Net Sales Inventory Turnover Computed with Average Inventory Average Inv. (Beg. Inv. + End Inv)/2 Inv. Turnover = Cost of Goods Sold / Average Inv. CGS per day = Cost of Goods Sold/365 Days Inventory Computed with Average Inventory 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 KEYSTONE COMPUTERS & NETWORKS, INC. Working Trial Balance For the Period Ended December 31, 20x5 Prepared b Reviewed A Ref # Adjustments Dr (Cr) Account # 1000.10 1000.20 1000.30 1000.40 1050.10 1050.40 1050.90 1100.10 1300.10 2050.10 2050.30 2050.80 2050.90 2100,00 2200.00 3050.10 3100.00 3200,10 3300.30 3400.50 4400.10 5050.10 5100.10 5700.10 5900.00 Account Name Cash-General Account Cash-Special Account Cash in Register Petty Cash Accounts receivable--trade Accounts receivable-officers Allowance for bad debts Inventories Prepaid expenses Furniture & fixtures Office equipment Leasehold improvements Accumulated depreciation Software development cost Intangible assets Accounts payablo--trade Capital lease obligations-current Accrued liabilities Unearned service revenue Line of credit Capital lease obligations-noncurrent Capital stock Pald-in capital Retained earnings Dividends Prior Period Balance 12/31/X4 42,754 9.960 1.200 50 8,534,524 57,643 196,000) 1.234,589 156,900 300,980 789,654 98.900 (2,50,987) Unadjusted Trial Balance Dr (Cr) 66,034 10,150 1.200 50 10.235,457 84,670 (104,000) 1,375,835 176,456 344,900 974,676 91,230 (404,560) 178,000 800,000 (1,429,033) (45,675) (203.450) (42.300) (8.632,105) (423,680) (200,000) (423.500) (2,615,478) 415,000 229,877 (229.877) 0 1.000.000 (1,349,839) (43,200) (178,900) (6.612,550) (456,700) (200,000) (423,500) (1,626,203) 989,275 1989.275) 0 Working Trial Balance For the Period Ended December 31, 20X5 Prepared by Reviewed by Account # Account Name Prior Period Balance 12/31/X4 Unadjusted Trial Balance Dr (Cr) Adjustments Dr (Cr) Adja Ref 6000.10 6010.10 6020.10 6030.10 7020.10 7070.10 7070.50 7075.10 7080.10 7080.30 7090.10 7090.30 7090.50 7100.10 7140.10 7200.10 7260.30 7320.10 7410.10 7600.10 7650.10 7700.10 7800.10 7900.10 7900.70 9000.00 Sales of computers Software licenses Service revenue Consulting revenue Cost of sales Salaries-sales Payroll benefits-sales Advertising & promotion Travel & entertainment Miscellaneous exp-sales Salaries-operations Salaries-administrative Payroll benefits-admin Rent Utilities Insurance Legal & accounting Bad debt expense Supplies Depreciation and amort. Software development Miscellaneous exp-administrative Interest expense Current income taxes Deferred income taxes P&L Summary (44,890.788) (248.900) (4,567,888) (46,751,990) 74.122.435 3,167,889 913,456 1.200,786 609.788 334,890 4,878,900 4,234,234 1,812,344 797.800 210,495 356,890 457,577 234,500 556,345 334,565 289,100 234.556 421,344 256,765 45.632 989,275 0 0 0 (42,345,675) (236,700) (4,325,777) (45,677,899) 72,134,566 2,765,677 857,368 1,567,889 445,600 278,656 4,544,860 3.945,670 1,734,565 721,345 234,839 378,677 485.767 256,678 478,900 367,867 345,645 245,456 476,899 80,100 9.150 (229,877) 229.877 O Instructions (Problem 6C-4) For the first task of the Audit Case Review, you will recalculate the analytical review ratios for the Keystone Computers & Networks. The working paper on page 254 shows the ratios prepared by the auditors. Use this working paper as a reference to perform the following procedures: a. Use the worksheet on page 2 to recalculate the ratios for 12/31/X5. Refer to the Working Trial Balance on pages 252-253 to calculate the ratios. Show your work on the worksheet and insert the results below: Keystone Computers & Networks, Inc. Analytical Review Ratios For the Period Ended December 31, 20x5 12/31/XS 12/31/X4 Industry Current Ratio 1.215 1.300 Days' Sales in Accounts Receivable. Computed with Average Accounts Receivable 33.2 37.000 Allowance for Doubtful Accounts / Accounts 1.1% Receivable Bad Debt Expense / Net Sales 0.2% Total Liabilities to Net Worth 2.7 2.900 Return on Total Assets 8.3% 9.0% Return on Net Worth 30.5% 29.0% Return on Net Sales 1.0% 2.3% Gross Profit/Net Sales 23.2% 24.0% Selling, Operating and Administrative Expense 21.4% 23.9% Times Interest Earned 4.1 5.5 b. 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. c. For each account identified in part (b), list potential reasons for the unexpected account balances and related ratios. 1 Audit Case Review: Task 1 Worksheet Case 6C-4 Details of Computations of 20x5 ratios Current Ratio Current Assets Current Liabilities Sales per day Sales/365 Days Sales in A/R Computed with Average A/R Average A/R = (Beg. A/R + End A/R)/2 Days sales = Average A/R/Sales per day Allowance for Bad Debts/A/R Bad Debts Expense / Net Sales Inventory Turnover Computed with Average Inventory Average Inv. (Beg. Inv. + End Inv)/2 Inv. Turnover = Cost of Goods Sold / Average Inv. CGS per day = Cost of Goods Sold/365 Days Inventory Computed with Average Inventory 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 KEYSTONE COMPUTERS & NETWORKS, INC. Working Trial Balance For the Period Ended December 31, 20x5 Prepared b Reviewed A Ref # Adjustments Dr (Cr) Account # 1000.10 1000.20 1000.30 1000.40 1050.10 1050.40 1050.90 1100.10 1300.10 2050.10 2050.30 2050.80 2050.90 2100,00 2200.00 3050.10 3100.00 3200,10 3300.30 3400.50 4400.10 5050.10 5100.10 5700.10 5900.00 Account Name Cash-General Account Cash-Special Account Cash in Register Petty Cash Accounts receivable--trade Accounts receivable-officers Allowance for bad debts Inventories Prepaid expenses Furniture & fixtures Office equipment Leasehold improvements Accumulated depreciation Software development cost Intangible assets Accounts payablo--trade Capital lease obligations-current Accrued liabilities Unearned service revenue Line of credit Capital lease obligations-noncurrent Capital stock Pald-in capital Retained earnings Dividends Prior Period Balance 12/31/X4 42,754 9.960 1.200 50 8,534,524 57,643 196,000) 1.234,589 156,900 300,980 789,654 98.900 (2,50,987) Unadjusted Trial Balance Dr (Cr) 66,034 10,150 1.200 50 10.235,457 84,670 (104,000) 1,375,835 176,456 344,900 974,676 91,230 (404,560) 178,000 800,000 (1,429,033) (45,675) (203.450) (42.300) (8.632,105) (423,680) (200,000) (423.500) (2,615,478) 415,000 229,877 (229.877) 0 1.000.000 (1,349,839) (43,200) (178,900) (6.612,550) (456,700) (200,000) (423,500) (1,626,203) 989,275 1989.275) 0 Working Trial Balance For the Period Ended December 31, 20X5 Prepared by Reviewed by Account # Account Name Prior Period Balance 12/31/X4 Unadjusted Trial Balance Dr (Cr) Adjustments Dr (Cr) Adja Ref 6000.10 6010.10 6020.10 6030.10 7020.10 7070.10 7070.50 7075.10 7080.10 7080.30 7090.10 7090.30 7090.50 7100.10 7140.10 7200.10 7260.30 7320.10 7410.10 7600.10 7650.10 7700.10 7800.10 7900.10 7900.70 9000.00 Sales of computers Software licenses Service revenue Consulting revenue Cost of sales Salaries-sales Payroll benefits-sales Advertising & promotion Travel & entertainment Miscellaneous exp-sales Salaries-operations Salaries-administrative Payroll benefits-admin Rent Utilities Insurance Legal & accounting Bad debt expense Supplies Depreciation and amort. Software development Miscellaneous exp-administrative Interest expense Current income taxes Deferred income taxes P&L Summary (44,890.788) (248.900) (4,567,888) (46,751,990) 74.122.435 3,167,889 913,456 1.200,786 609.788 334,890 4,878,900 4,234,234 1,812,344 797.800 210,495 356,890 457,577 234,500 556,345 334,565 289,100 234.556 421,344 256,765 45.632 989,275 0 0 0 (42,345,675) (236,700) (4,325,777) (45,677,899) 72,134,566 2,765,677 857,368 1,567,889 445,600 278,656 4,544,860 3.945,670 1,734,565 721,345 234,839 378,677 485.767 256,678 478,900 367,867 345,645 245,456 476,899 80,100 9.150 (229,877) 229.877 O