1.

Prepare a vertical analysis for each of the three periods, 1985, 1986, and the three months in
ZZZZ Best Co. Inc.
Statement of income
Vertical analysis
1985
1986
7/31/1986
1985
Net Sales
1,240,524
4,845,347
5,395,754
100.00%
Cost of goods sold
576,694
2,050,779
2,976,205
46.49%
Gross margin
663,830
2,794,568
2,419,549
53.51%
General expenses
306,016
1,125,541
622,811
24.67%
Joint venture income
186,679
102,066
0.00%
Operating income
357,814
1,855,706
1,898,804
28.84%
Interest expense
43,020
64,097
0.00%
Income-taxes current
36,053
48,027
121,133
2.91%
Income-taxes deferred
819,014
817,621
0.00%
Net Income
321,761
945,645
895,953
25.94%
Earnings per share
0.04
0.12
0.11
Balance Sheet
Cash
Accounts Receivable
Unbilled Charges on Restoration
Advances - Joint Venture
Advances on Materials
Prepaid Expenses
Other
Total Current Assets
Fixed Assets
Accu Depreciation
Capitalized Leases
Deposits
Other Assets
Total Assets
Liabilites & Equity
Notes Payable - Current
Equip Purchases Payable
Accounts Payable
Current Portion - Leases
Income Taxes Payable
Overbilled Charges on Restoratio
Deferred Income Taxes
Current Portion - Notes
Total Current Liabilities
Notes Payable
Leases Payable
Deferred Income Taxes
Total Liabilities
Common Stock
Additional Paid in capital
Retained Earnings
Total Liabilities & Equity

4/30/1985
30,321
25,364
51,411
107,096
125,519
(68,029)
13,450
178,036
2,930
2,930
2,930
55,000
55,000
65,106
178,036

4/30/1986 3 Mos 7/31/86

87,014
9,907
693,773
2,461,098
428,810
117,108
136,000
1,330,000
125,307
59,392
139,961
382,592
1,727,973
4,242,989
2,564,632
3,254,191
(163,145)
(268,796)
655,733
710,652
235,994
237,189
24,484
23,866
5,045,671
8,200,091

Vertical analysis
1985
17.03%
0.00%
0.00%
0.00%
0.00%
14.25%
28.88%
60.15%
70.50%
-38.21%
0.00%
7.55%
0.00%
100.00%

780,507
575,000
237,340
147,561
28,027
1,768,436
428,471
819,014
3,015,920
76,675
942,325
1,010,751
5,045,671

0.00%
0.00%
1.65%
0.00%
0.00%
0.00%
0.00%
0.00%
1.65%
0.00%
0.00%
0.00%
1.65%
30.89%
30.89%
36.57%
100.00%

1,971,624
362,916
157,556
65,160
107,301
1,400,139
40,000
4,104,696
515,000
418,195
236,496
5,274,387
76,675
942,325
1,906,704
8,200,091

2. Prepare two horizontal analyses, one for the changes between 1985 and 1986 and the other
ZZZZ Best Co. Inc.
Statement of income
Horizontal Analysis

Net Sales
Cost of goods sold
Gross margin
General expenses
Joint venture income
Operating income
Interest expense
Income-taxes current
Income-taxes deferred
Net Income
Earnings per share

1985
1,240,524
576,694
663,830
306,016
357,814
36,053
321,761
0.04

1986
4,845,347
2,050,779
2,794,568
1,125,541
186,679
1,855,706
43,020
48,027
819,014
945,645
0.12

7/31/1986 15 mos 7/31/198

5,395,754
10,241,101
2,976,205
5,026,984
2,419,549
5,214,117
622,811
1,748,352
102,066
288,745
1,898,804
3,754,510
64,097
107,117
121,133
169,160
817,621
1,636,635
895,953
1,841,598
0.11

4/30/1985
30,321
25,364
51,411
107,096
125,519
(68,029)
13,450
178,036

4/30/1986 3 Mos 7/31/86

87,014
9,907
693,773
2,461,098
428,810
117,108
136,000
1,330,000
125,307
59,392
139,961
382,592
1,727,973
4,242,989
2,564,632
3,254,191
(163,145)
(268,796)
655,733
710,652
235,994
237,189
24,484
23,866
5,045,671
8,200,091

Balance Sheet
Cash
Accounts Receivable
Unbilled Charges on Restoration
Advances - Joint Venture
Advances on Materials
Prepaid Expenses
Other
Total Current Assets
Fixed Assets
Accu Depreciation
Capitalized Leases
Deposits
Other Assets
Total Assets
Liabilites & Equity
Notes Payable - Current
Equip Purchases Payable
Accounts Payable
Current Portion - Leases
Income Taxes Payable
Overbilled Charges on Restoratio
Deferred Income Taxes
Current Portion - Notes
Total Current Liabilities
Notes Payable
Leases Payable
Deferred Income Taxes
Total Liabilities
Common Stock
Additional Paid in capital
Retained Earnings
Total Liabilities & Equity

Horizontal Analysis

2,930
2,930
2,930
55,000
55,000
65,106
178,036

780,507
575,000
237,340
147,561
28,027
1,768,436
428,471
819,014
3,015,920
76,675
942,325
1,010,751
5,045,671

1,971,624
362,916
157,556
65,160
107,301
1,400,139
40,000
4,104,696
515,000
418,195
236,496
5,274,387
76,675
942,325
1,906,704
8,200,091

3. Prepare a summary of the Balance Sheet and Operations Ratios which pertain to the operatio
Balance Sheet Ratios
4/30/1985
4/30/1986 3 Mos 7/31/86
Current Ratio
36.55
0.98
1.03
Days sales in accounts receivable
NM
52.3
41.6
Debt Ratio
2%
60%
64%

Debt to Equity
Return on Equity
Return on Assets
Asset Turnover

Operations Ratio
Gross Margin
Operating Margin
Net Margin

184%
181%
6.97

0.67
47%
19%
0.96

1.06
122%
44%
2.63

54%
29%
26%

58%
38%
20%

45%
35%
17%

4. Based on your answers to questions 1, 2, and 3 above, what relationships indicate that furth
Relationship between revenues, accounts receivable and advance for materials require further
investigation. Revenue rose a mammoth 290% and 726% for the twelve and fifteen months ending April
30, 1986 and July 31, 1986. Total current assets (mainly contributed by Accounts receivable and
advances on materials) too rose 1,613% and 3,962% respectively for the period ending April 30, 1986
and July 31, 1986. Also part of the working capital, Accounts payable too rose ~8,100% and 12,386%
arousing suspicion.
1985
1986
7/31/1986
Increase in Revenue
0%
290.59%
725.55%
Increase in Current Assets
0%
1613.48%
3961.86%
Increase in Acounts payable
0%
8100.34% 12386.21%
14000.00%
12000.00%
10000.00%
8000.00%

1985

6000.00%

1986
7/31/1986

4000.00%
2000.00%
0.00%
Increase in
Revenue

Increase in
Current Assets

Increase in
Acounts payable

5. What does "Unbilled Charges on Restorations" represent?

Unbilled charges on restorations is reported as $428,810 for the period ending 4/30/1986. This amount
represents the charges with respect to restoration work being carried out. Usually, under percentage of
completion method, under-billing happens when costs exceed the billing.

6. For the three months ended July 31, 1986, there was a zero balance in Unbilled Charges oh R
Yes, There is significance since the company had reported zero unbilled charges on restorations.
Overbilling can be carried out only when billings are in excess of cost. Usually sub-contractors are
under-billed and ther reverse holds true for contractors. Also, in the prior period, the company reported
unbilled charges on restorations. Hence, a rationale view will be to have the same in this year too.

7. What do you think "Advances on Materials" represents?

Advances on Materials represents the amount spent by the company for materials yet to be received.
Its similar to advance payments made.

8. What do you think "Advances - Joint Ventures" represents?

Advances - Joint Ventures represents the amount given by the company towards the Joint Venture for
carrying out restoration contracts.

9. Can you identify the scheme(s) involved? If so, what might they have been? (Hint: explore th
The scheme involved is a ponzi/bogus scheme carried out to make money illegally by carrying out
accounting fraud. The first question that arises is that how can a young start up company increases its
revenues and profitability manifolds in a span of just ~1.5 to two years. This can be furthered by the
comparison between receivables and revenues carried out below:
a. Increases in Accounts Receivable and increases in Advances on Materials?
For the three months ending July 31, 1986, the advances on materials rose 878% as against a rise of
255% in receivables. This clearly indicates a case of accounting fraud, wherein revenues, accounts
receivable and advances on materials are used as tools to inflate revenue and profitability. The
company may have shown larger receivables, thereby showing larger collections and then utilizing
amount
towards
advance
payments
materials.in Sales?
b. Increases
in making
Accounts
Receivable
andon
increases
Sales for the three months ending July 31, 1986 was larger than the entire twelve months ending April
31, 1986 sending signals of fraud or misrepresentation to everyone. Even if one annualizes the three
months revenue and compares with the previous year, there is a rise of ~345%. Even the accounts
receivable during the period rose ~255%.

and the three months in fiscal year 1987.

Vertical analysis
1986 7/31/1986
100.00%
100.00%
42.32%
55.16%
57.68%
44.84%
23.23%
11.54%
3.85%
1.89%
38.30%
35.19%
0.89%
1.19%
0.99%
2.24%
16.90%
15.15%
19.52%
16.60%

Vertical analysis
1986 7/31/1986
1.72%
0.12%
13.75%
30.01%
8.50%
0.00%
2.32%
0.00%
2.70%
16.22%
2.48%
0.72%
2.77%
4.67%
34.25%
51.74%
50.83%
39.68%
-3.23%
-3.28%
13.00%
8.67%
4.68%
2.89%
0.49%
0.29%
100.00%
100.00%
15.47%
11.40%
4.70%
2.92%
0.56%
0.00%
0.00%
0.00%
35.05%
0.00%
8.49%
16.23%
59.77%
1.52%
18.68%
20.03%
100.00%

24.04%
0.00%
4.43%
1.92%
0.79%
1.31%
17.07%
0.49%
50.06%
6.28%
5.10%
2.88%
64.32%
0.94%
11.49%
23.25%
100.00%

and 1986 and the other for the changes for the fifteen (15) month period, 1985 through the first three mo
Horizontal Analysis

1986
290.59%
255.61%
320.98%
267.80%
NM
418.62%
NM
33.21%
NM
193.90%
200.00%

7/31/1986
725.55%
771.69%
685.46%
471.33%
NM
949.29%
NM
369.20%
NM
472.35%

Horizontal Analysis
1986 7/31/1986
286.98%
32.67%
NM
NM
NM
NM
NM
NM
NM
NM
494.03%
234.16%
272.24%
744.18%
1613.48% 3961.86%
2043.22% 2592.59%
239.82%
395.12%
NM
NM
1754.60% 1763.49%
NM
NM
2834.07% 4605.86%
NM
NM
NM
NM
8100.34% 12386.21%
NM
NM
NM
NM
NM
NM
NM
NM
NM
NM
60356.18%
###
NM
NM
NM
NM
NM
NM
###
###
139.41%
139.41%
1713.32% 1713.32%
1552.47% 2928.61%
2834.07% 4605.86%

h pertain to the operations of this company.

hips indicate that further investigation might be prudent? Prepare a graph of these items which you cons

equire further
en months ending April
receivable and
ending April 30, 1986
,100% and 12,386%

30/1986. This amount

y, under percentage of

n Unbilled Charges oh Restoration, yet there was a balance of $107,301 in Overbilled Charges on Restorat

on restorations.
b-contractors are
the company reported
e in this year too.

s yet to be received.

he Joint Venture for

been? (Hint: explore the relationships detailed below.)

y by carrying out
ompany increases its
be furthered by the

as against a rise of
venues, accounts
ofitability. The
and then utilizing

months ending April

annualizes the three
Even the accounts

5 through the first three months of fiscal year 1987.

these items which you consider worthy of further investigation.

erbilled Charges on Restoration. Is there any significance to this difference?