The Regina Company, Inc. BALANCE SHEET (In Thousands) ASSETS Cash Accounts Receivable Inventories Other Current Assets Total Current Assets Fixed Assets Accum Depreciation Other Assets TOTAL ASSETS LIABILITIES & EQUITY Lines of Credit Cur Portion-L/T Debt Accounts Payable Accrued Liabilities Income Taxes Payable Total Current Liabilities Bonds Payable Bank Debt Deferred Income Taxes TOTAL LIABILITIES Common Stock Add'l Paid in Capital Retained Earnings Currency Adjustments Treasury Stock TOTAL LIABILITIES & EQUITY 12/31/86 (Audited) $ 63 14,402 9,762 708 24,935 19,523 (3,140) 1,884 $43.202 2,707 0 7,344 3,127 1,554 14,732 14,800 0 685 30,217 1 8,010 5,210 0 (236) $43,202 12/31/87 (Audited) $ 514 27,801 19,577 _1.449 49,341 19,736 (4,948) 1,112 $65,241 0 900 15,072 5,468 2,619 24,059 13,900 5,941 1,254 45,154 1 8,018 12,315 0 (247) $65,241 12/31/88 (Audited) $ 885 51,076 39,135 3.015 94,111 27,884 (6,336) 2.481 $118.140 0 1,250 13,288 4,710 3.782 23,030 14,625 47,432 1.881 86,968 1 8,023 23,269 126 (247) $118,140 The Regina Company, Inc. STATEMENT OF INCOME (In Thousands) Net Sales Costs of Goods Sold Gross Margin General Expenses Operating Income Interest Expense Income Taxes Net Income Earnings Per Share 12/31/86 (Audited) $76,144 46,213 29,931 20,105 9,826 1,930 3.807 4.089 0.46 12/31/87 (Audited) $128,234 70.756 57,478 42,600 14,878 1,584 6,189 7,105 0.78 12/31/88 (Audited) $181,123 94.934 86,189 64.285 21,904 3,189 7.761 10,954 1.21 The Regina Company, 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?