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 on the following pages and are now beginning your analysis of those financial statements. Please note: the balance in inventories on January 1, 2016 was $11,427,937.

Questions Calculate the 2017 and 2016 liquidity ratios identified using the ratio analysis table below. Also calculate the change and the percentage change for the ratios and complete the table. (Formulas are given to shorten the time spent on the assignment.)

Analyze the Chipmunk Companys 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?

Case Study 1 CHIPMUNK COMPANY BALANCE SHEET DECEMBER 31, 2017 AND 2016

Assets

2017

2016

Current assets

Cash

$ 1,320,096

$ 1,089,978

Accounts receivable: net (Notes 2 and 5)

1,646,046

1,285,593

Inventories [Notes 1(a), 3, and 5]

13,524,349

12,356,400

Prepaid expenses

17,720

15,826

Deposits

7,916

5,484

Total current assets

$16,516,127

$14,753,281

Property, plant, and equipment [Notes 1(b) and 4] at cost, less accumulated depreciation

596,517

612,480

Total Assets

$17,112,644

$15,365,761

Liabilities

Current liabilities

Notes payableBank (Note 5)

$5,100,000

$ 4,250,000

Accounts payable

1,750,831

1,403,247

Accrued liabilities

257,800

217,003

Federal income taxes payable

35,284

45,990

Current portion of long-term debt (Note 6)

5,642

5,642

Total current liabilities

$ 7,149,557

$ 5,921,882

Long-term liabilities

Long-term debt (Note 6)

409,824

415,466

Total Liabilities

$ 7,559,381

$ 6,337,348

Stockholders Equity

Common stock (Note 7)

$10,000

$10,000

Additional paid-in capital

2,500,000

2,500,000

Retained earnings

7,043,263

6,518,413

Total stockholders equity

$ 9,553,263

$ 9,028,413

Total Liabilities and Stockholders Equity

$17,112,644

$15,365,761

Case Study 1 CHIPMUNK COMPANY STATEMENT OF INCOME AND RETAINED EARNINGS FOR THE YEARS ENDED DECEMBER 31, 2017 AND 2016

2017

2016

Sales

$26,456,647

$22,889,060

Sales returns and allowances

37,557

27,740

Net sales

$26,419,090

$22,861,320

Cost of sales

19,133,299

16,530,114

Gross profit

$7,285,791

$6,331,206

Expenses

Accounting

$ 48,253

$ 46,750

Advertising

28,624

27,947

Depreciation

46,415

46,578

Bad debts

148,252

162,344

Business publications

1,231

872

Cleaning services

15,817

12,809

Fuel

64,161

53,566

Garbage collection

4,870

4,674

Insurance

16,415

16,303

Interest

427,362

364,312

Legal

69,752

29,914

Licensing and certification fees

33,580

27,142

Linen service

3,044

1,939

Medical benefits

4,178

4,624

Miscellaneous

47,739

16,631

Office supplies

26,390

23,289

Payroll benefits

569,110

461,214

Pension expense

40,770

37,263

Postage and courier

8,623

20,962

Property taxes

3,978

27,947

Rent

158,526

120,000

Repairs and maintenance

51,316

26,439

Salaries and wages

4,310,281

3,970,092

Security

96,980

100,098

Telephone

5,707

7,092

Travel and entertainment

21,633

16,303

Utilities

63,329

41,919

Total expenses

$ 6,316,336

$ 5,669,023

Net income before income tax

$ 969,455

$ 662,183

Income tax expense

344,605

239,406

Net Income

$ 624,850

$ 422,777

Retained earnings at beginning of year

6,518,413

6,195,636

Less: Dividends

100,000

100,000

Retained earnings at end of year

$7,043,263

$6,518,413