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    Indications of Fraud in Ratios

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    2002 2001

    Sales 1,000,000 1,200,000
    COGS 800,000 960,000
    Accounts Receivable 500,000 600,000
    Net Income 52,000 103,000
    # of shares outstanding 100,000 100,000

    Upon computing the above ratios, the internal auditors found nothing suspicious and concluded that fraud didn't exist.

    A. Compute the ratios listed above. Is there anything specific you see in the ratios that would indicate fraud?

    Gross Profit Margin = Gross Profit/Net Sales= Net Sales - COGS/Net Sales
    YR 2001: 1,200,000-960,000 = 0.7
    YR 2002: 1,000,000-800,000 = 0.7

    Accts Rec Turnover - Net Sales/Accts Rec
    YR 2001: 1,200,000/500,000 = 2.4
    YR 2002: 1,000,000/600,000 = 1.66

    # of days in rec = Accts rec turnover/365
    YR 2001: 2.4/365 = .006575342
    YR 2002: 1.66/365 = .004547945

    EPS = Net income/shares outstanding
    YR 2001: 52,000/100,000 = 0.52
    YR 2002:103,000/100,000 = 1.03

    © BrainMass Inc. brainmass.com December 24, 2021, 6:07 pm ad1c9bdddf
    https://brainmass.com/business/financial-ratios/indications-fraud-ratios-92717

    Solution Preview

    To avoid frauds, the financial reporting should provide information that is:
    (en.wikipedia.org)

    - Useful to present and potential investors and creditors and other users in making rational investment, credit, and other financial decisions.
    - Helpful to present and potential investors and creditors and other users in assessing the amounts, timing, and uncertainty of prospective cash receipts.
    - About economic resources, the claims to those resources, and the changes in them.

    One of the important principals to ...

    Solution Summary

    Solution explains what to look for when searching for evidence of fraud in financial ratios reported. It also attaches an Excel file to support that point.

    $2.49

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