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Pacific Corporation - Fraud question/analysis

Pacific Corporation conducted its operations in San Diego, California. It was a dominant player in the surfboard industry. Pacific was started in the late 1900's, and its customers were remarkably loyal. The mom-and-pop shop was steadily growing in an industry continually saturated by thousands of start ups. The loyalty of its customers helped Pacific maintain higher prices, quality goods, and a good market share in the industry. Mark, the son of the owner Bill, moved home to become the family accountant. His parents' success amazed him, and he wanted to find out exactly what made the company so successful. He decided to run ratios on the following numbers:

2000 1999 1998
Sales 4,500,000 2,000,000 500,000
COGS 3,735,000 1,640,000 400,000
Accounts receivable 2,000,000 400,000 95,000
Bad Debt Expense 100,000 80,000 70,000
Inventory 200,000 100,000 50,000

Upon doing several calculations, Mark decided the company was potential committing fraud, or at least losing money due to customer's non-payment.

A. What ratio's could verify Mark's assumptions?
B. Compute these ratios and explain your answers.
C. If fraud exists, what could his parents do to solve the problem?

Solution Preview

A. What ratio's could verify Mark's assumptions?

We will use days sales outstanding and bad debt to accounts receivable ratios.

B. Compute these ratios and explain your answers.

Days sales outstanding = Receivables/Average sales per day
= ...

Solution Summary

This solution is comprised of a detailed explanation to answer the request of the assignment of more than 800 words of text.