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Indications of Fraud in Ratios

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

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.

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