You are a fraud investigator who has been hired to detect financial statement fraud for the Chipmunk company. You have been provided with the financial statements below.

Balance Sheet as at $31$ December $2023$ and $2022$

Current assets: $2023$

$ $2022$

$

Cash $1,320,0961,089,978$

Accounts receivable: net $1,646,0461,285,593$

Inventories $13,524,34912,356,400$

Prepaid expenses $17,72015,826$

Deposits $7,9165,484$

Total current assets $16,516,12714,753,281$

Property, plant and equipment: cost less accumulated depreciation $596,517612,480$

Total assets $17,112,64415,365,761$

Current liabilities:

Notes payable $-$ bank $5,100,0004,250,000$

Accounts payable $1,750,8311,403,247$

Accrued liabilities $257,800217,003$

Federal income taxes payable $35,28445,990$

Current portion of long$-$term debt $5,6425,642$

Total current liabilities $7,149,5575,921,882$

Long$-$term liabilities $($debt$)409,824415,466$

Total liabilities $7,559,3816,337,348$

Shareholders$$ equity:

Common Stock $10,00010,000$

Additional paid$-$in capital $2,500,0002,500,000$

Retained earnings $7,043,2636,518,413$

Total shareholders$$ equity $9,553,2639,028,413$

Total liabilities and shareholders$$ equity $17,112,64415,365,761$

Note that the balance of inventories on $1$ January $2022$ was $$11,427,937.$

Statement of Income and Retained Earnings

for the year ended $31$ December $2023$ and $2022$

$2023$

$ $2022$

$

Sales $26,456,64722,889,060$

Less sales returns and $37,55727,740$

Net sales $26,419,09022,861,320$

Less cost of sales $19,133,29916,530,114$

Gross profit $7,285,7916,331,206$

Less expenses including income tax $6,660,9415,908,429$

Net income $624,850422,777$

Retained earnings at the beginning of the year $6,518,4136,195,636$

Less Dividends $100,000100,000$

Retained earnings at the end of the year $7,043,2636,518,413$

Required:

$($a$)$ Using information and amounts in the above financial statements, calculate the $2023$ and $2022$ liquidity ratios, the change and percentage change in the table below. Write formula for each ratio. Industry average is given.

$(5$ ratios x $1\mathrm{.}5=7\mathrm{.}5$ marks$)$

LIQUIDITY RATIOS $31/12/202331/12/2022$ Change $\%$change Industry average

Current ratio

Formula:

Quick ratio

Formula:

Sales to receivables

Formula:

Number of days sales in A$/$R

Formula:

Inventory turnover ratio

Formula:

$($b$)$ Analyse the ratios for both years and compare the figures with the given industry ratios. Based on the ratios identified, where do you think fraud may have occurred?