Analytical Procedures Are Evaluations of Financial Information Made by a Study

question 37

Essay

Analytical procedures are evaluations of financial information made by a study of plausible relationships among financial and nonfinancial data.Understanding and evaluating such relationships are essential to the audit process.
The following financial statements were prepared by ABC Manufacturing Co.for the year ended December 31,2013.Also presented are various financial statement ratios for Holiday as calculated from the prior year's financial statements.Sales represent net credit sales.The total assets and the receivables and inventory balances at December 31,2013,were the same as at December 31,2012.
Required:
Items 1 through 9 below represent financial ratios that the auditor calculated during the prior year's audit.For each ratio,calculate the current year's ratio from the financial statements presented above.


$\begin{array}{lccc}&&&&&&\text { A B C ManufacturingCo.}\\&&&&&&\text { Balance Sheet}\\&&&&&&\text { December 31,2013}\\\end{array}$

$\begin{array}{l}\begin{array} { l } \text { Assets }\\\\\text { Cash } & \$ 240,000 \\\text { Receivables } & 400,000 \\ \text { Inventory } & 600,000 \\\quad \text { Total current assets } & \$ 1,240,000 \\\text { Plant and equipment-net } & 760,000 \\\\\text { Total assets } & \$2,000,000\end{array}\begin{array} { l } \text { Liabilities and Capital }\\\\\text { Accounts payable } & \$ 160,000 \\\text { Notes payable } & 100,000 \\\text { Other current liabilities } & 140,000 \\ \text { Total current liabilities } & \$ 400,000 \\\text { Long-term debt } & 350,000 \\\text { Common stock } & 750,000 \\\text { Retained earnings } & 500,000 \\\text { Total liabilities and capital } & \$ \underline{\underline{2}, 000,000}\end{array}\end{array}$
$$\begin{array} { | l l | l | c | } \hline { \text { Calculation } } && \underline { 12 / 31 / 2013 } & \underline { 12 / 31 / 2012 } \\\hline \text { 1. } \text { Current ratio } & && 2.5 \\\hline \text { 2. } \text { Quick ratio } && & 1.3 \\\hline \text { 3. } \text { Accounts receivable turnover } && & 5.5 \\\hline \text { 4. } \text { Inventory turnover } && & 2.5 \\\hline \text { 5. } \text { Total asset turnover } && & 1.2 \\\hline \text { 6. } \text { Gross margin percentage } && & 35 \% \\\hline \text { 7. } \text { Net operating margin \% } && & 25 \% \\\hline \text { 8. } \text { Times interest earned } & && 10.3 \\\hline \text { 9. } \text { Total debt to equity } & && 50 \% \\\hline\end{array}$$

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Definitions:

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