The Regina Comapny, INC The Regina Company, Inc ( Regina ) was engaged in the manufacture and marketing of various household equipment, such as vacuum cleaners and whirlpools Regina's financial statements are on the following two pages Use these financial statements to answer the following questions 1 Prepare a vertical analysis on the financial statements 2 Based on the results of question 1, what relationships appear to be out of alignment 3 Is the relationship between sales and cost of goods sold linear 4 Should the relationship between sales and cost of goods sold be linear a If so, why b If not, why not 5 Can you identify the potential fraud a If so, how did you determine there was a potential fraud b If not, what other information would help determine if there is a potential fraud Regnia Company Statement of Income Statement of income 12 31 86 12 31 87 12 31 88 (In thousands) (Audited) (Audited) (Audited) Net Sales $76,144 $128,234 $181,123 Cost of Goods Sold 46,213 70,756 94,934 Gross Margin 29,931 57,478 86,189 General Expenses 20,105 42,600 64,285 Operating Income 9,826 14,878 21,904 Interest Expense 1,930 1,584 3,189 Income Taxes 3,807 6,189 7,761 Net Income 4,089 7,105 10,954 Earnings Per Share 0 46 0 78 1 21 Regina Company Balance Sheet Balance Sheet 12 31 86 12 31 87 12 31 88 (In Thousands) (Audited) (Audited) (Audited) Assets Cash $63 $514 $885 Accounts Receivable 14,402 27,801 51,076 Inventories 9,762 19,577 39,135 Other Current Assets 708 1,449 3,015 Total Current Assets 24,935 49,341 94,111 Fixed Assets 19,523 19,736 27,884 Accum Depreciation (3,140) (4,948) (6,336) Other Assets 1,884 1,112 2,481 TOTAL ASSETS $43,202 $65,241 $118,140 LIABILITIES EQUITY Lines Of Credit 2,707 0 0 Current Portion L T Debt 0 900 1,250 Accounts Payable 7,344 15,072 13,288 Accrued Liabilities 3,127 5,468 4,710 Income Taxes Payable 1,554 2,619 3,782 Total Current Liabilities 14,732 24,059 23,030 Bonds Payable 14,800 13,900 14,625 Bank Debt 0 5,941 47,432 Deferred Income Taxes 685 1,254 1,881 Total Liabilities 30,217 45,154 86,968 Common Stock 1 1 1 Additional Paid in Capital 8,010 8,018 8,023 Retained Earnings 5,210 12,315 23,269 Currency Adjustments 0 0 126 Treasury Stock (236) (247) (247) Total Liabilities Equity $43,202 $65,241 $118,140

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The Regina Comapny, INC The Regina Company, Inc. (Regina) was engaged in the manufacture and marketing of various household equipment, such as vacuum cleaners and

The Regina Comapny, INC

The Regina Company, Inc. ("Regina") was engaged in the manufacture and marketing of various household equipment, such as vacuum cleaners and whirlpools. Regina's financial statements are on the following two pages. Use these financial statements to answer the following questions: 1. Prepare a vertical analysis on the financial statements.

2. Based on the results of question #1, what relationships appear to be out of alignment?

3. Is the relationship between sales and cost of goods sold linear?

4. Should the relationship between sales and cost of goods sold be linear? a. If so, why? b. If not, why not?

5. Can you identify the potential fraud? a. If so, how did you determine there was a potential fraud? b. If not, what other information would help determine if there is a potential fraud?

Regnia Company Statement of Income

Statement of income	12/31/86	12/31/87	12/31/88
(In thousands)	(Audited)	(Audited)	(Audited)
Net Sales	$76,144	$128,234	$181,123
Cost of Goods Sold	46,213	70,756	94,934
Gross Margin	29,931	57,478	86,189
General Expenses	20,105	42,600	64,285
Operating Income	9,826	14,878	21,904
Interest Expense	1,930	1,584	3,189
Income Taxes	3,807	6,189	7,761
Net Income	4,089	7,105	10,954
Earnings Per Share	0.46	0.78	1.21

Regina Company Balance Sheet

Balance Sheet	12/31/86	12/31/87	12/31/88
(In Thousands)	(Audited)	(Audited)	(Audited)
Assets
Cash	$63	$514	$885
Accounts Receivable	14,402	27,801	51,076
Inventories	9,762	19,577	39,135
Other Current Assets	708	1,449	3,015
Total Current Assets	24,935	49,341	94,111
Fixed Assets	19,523	19,736	27,884
Accum Depreciation	(3,140)	(4,948)	(6,336)
Other Assets	1,884	1,112	2,481
TOTAL ASSETS	$43,202	$65,241	$118,140
LIABILITIES & EQUITY
Lines Of Credit	2,707	0	0
Current Portion-L/T Debt	0	900	1,250
Accounts Payable	7,344	15,072	13,288
Accrued Liabilities	3,127	5,468	4,710
Income Taxes Payable	1,554	2,619	3,782
Total Current Liabilities	14,732	24,059	23,030
Bonds Payable	14,800	13,900	14,625
Bank Debt	0	5,941	47,432
Deferred Income Taxes	685	1,254	1,881
Total Liabilities	30,217	45,154	86,968
Common Stock	1	1	1
Additional Paid in Capital	8,010	8,018	8,023
Retained Earnings	5,210	12,315	23,269
Currency Adjustments	0	0	126
Treasury Stock	(236)	(247)	(247)
Total Liabilities & Equity	$43,202	$65,241	$118,140