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Financial Statement BDO

1.5 The Leslie Fay Companies

Prepare common-sized financial statements for Leslie Fay for the period 1987-1991. For that same period, compute for Leslie Fay the ratios shown in Exhibit 2. Given these data, which financial statement items do you believe should have been of particular interest to BDO Seidman during that firm’s 1991 audit of Leslie Fay? Explain.

Leslie Fay Companies financial status between years 1987 and 1991 should have been of interest to BDO Seidman during the 1991 audit. By examining their financial statements and converting them to common-sized financial statements, they would be able to see the company’s trends more clearly.

After converting the statements I took a look at ratios for their company. The ratios that I have examined include: Current ratio, quick ratio, debt to assets ratio, times interest earned ratio, l-t debt to equity ratio, activity ratio, age of inventory ratio, a/r turnover ratio, age of a/r ratio, total asset turnover ratio, gross margin, profit margin from sales, return on total assets and finally, return on equity.

The current ratio shows that Leslie Fay had a decreasing trend until 1991 when they had an increase. A decreasing trend is not a positive one, because this means that the company is becoming less likely to be able to cover their liabilities. However, the current assets should meet the current liabilities at least twice. Leslie Fay Company has been able to do this for the last few years without a problem.

The increase in 1991 could also be a potential sign that the auditors should look into. Especially considering the fact that all of the previous years the trend has been decreasing constantly. Creditors also want this number to be at least 1.5. A 2 would be a better result. This would mean that the company is safe and able to meet their short term liabilities. After looking at this ratio I took the common-sized financial statements and examined the current assets and the current liabilities.

The trend for the total current assets is a constant increase as the years go along. That is until 1991 when the total current assets had a decreasing percentage. The liabilities, however, have an opposite trend. The total current liabilities increase and then decrease the following year. This could show a possible sign of something going on within the company that needs to be examined.

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The next ratio I examined was the quick ratio. Leslie Fay has pretty much the same trend as the current ratio. As the years go on the ratio is decreasing constantly. That is, until 1991 when the trend has a change and increases. Once again, this could be something of interest to BDO Seidman. The company may be creating things within the company to change their financial statements to better their audit in 1991.

These results mean that for example, in 1991 for every dollar of current liabilities there was $1.55 dollars of easily convertible assets. Creditors are looking for an amount greater than one. A reason that the company may be trying to help their financial statements along is because their amounts were becoming dangerously close to one. However, this result could also mean that they just had a better year than the previous years.

But because creditors want this result to be at least 1.5, this makes their results a little suspicious. Also, the considerably large decreasing amount from 1987 of 3.089 could be a concern for the auditors. After looking at the ratios, the common-sized financial statements show the same as above for the current liabilities and current assets, but the inventories have an increasing trend until 1991 when it decreases.

After the quick ratio I took a look at the debt to assets ratio. Throughout these years there is a constant decreasing trend. With the results of this ratio, a company will want smaller numbers. Leslie Fay Company has been able to accomplish that goal. The higher the number the riskier the results. Therefore, these results with this ratio show that with .834 in 1991 is not a huge concern for the company. This means that the company has a better chance of financing through equity and not their debt.

The times interest earned ratio, also the next ratio I looked at, shows that there is a constant increasing trend until 1991 when the amount decreases once again. This ratio is a part of the long-term debt ratios. The results show, for example, in 1991 Leslie Fay Companies had 3.415 times its interest charges. This is a strength for the company. A larger number is the preferred outcome for this ratio. The common-sized financial statements show that the companies operating expenses show a pretty constant until 1991 when the trend decreases. The interest expense shows a constant decreasing trend until 1990 when the results become stable at .022.

The results from the l-t debt to equity show a fluctuating trend. The results are increasing and decreasing constantly, but the results also stay within a range below one. However, in 1989 and on the results stayed decreasing. The auditors may want to check this one out to make sure they are not trying to hide anything. A company with a low number is defiantly good, but if the financials are played with these results may not actually show the whole picture. The common-sized financial statements show a constant trend of .003 with the exception of 1987 for l-t debt.

Within the activity ratios I examined the inventory turnover ratio. The trend was pretty stable. It was set around 4 until 1990 when it dropped down to 3.98, and then increased again in 1990. For these results a higher number is better. Leslie Fay been able to show a positive result for this ratio. However, the auditors may also want to check to see if these results show actuality.

After examining the inventory turnover ratio, I took a look at the age of inventory. These results showed me that in 1991 inventory was being held for about 79 days until it was being sold. The results also show an increasing trend as the years went along.

This would show that the company was unable to sell the inventory that they had on hand. The increase in 1991 may show that the company was trying to sell their inventory quicker or maybe scheming a way to help these results. In 1990 their result was about 92 days. So the dramatic decrease may be something that the auditors want to investigate. This ratio does not really need the examination of the common-sized financial statements because it uses the results from the inventory turnover ratio.

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The total asset turnover has an increasing trend until 1990 when the trend decreases for a year. In 1991 the trend increases again. The increasing trend shows that Leslie Fay Companies has efficiently utilized its assets.

The Gross Profit Margin shows a relatively stable trend set around .3. Results around 33% mean that the products are marked up 50%. We can see from our results that they seem to do just that. A stable trend shows a positive result. The net sales are set at 100% on the common-sized financial statements. The cost of goods sold is stable around .6 with the exception of 1990 with a result of 1.006.

Profit margin on sales also has a stable trend around .03. A low result could mean that Leslie Fay is using a pricing strategy. Another wards, Leslie Fay is contributing 3 cents to its bottom line. These results show how much of the sales are going to income for the company.

The return on total assets ratio is also stable around 1%. Another name for return on assets is return on investment. Anything below 1% shows that the company is asset-heavy. Therefore, by the results of this ratio we can see that Leslie Fay Companies are shown to be asset-heavy.

The last ratio I analyzed was the return on equity ratio. The results show around a 1.5%, also considerably stable. This means that 1% of assets are created for every dollar that was initially put into the company.

After examining all of these ratios I have been able to see a trend throughout all of them. It seems that the ratios were going in a constant trend until 1991. This may be a concern for the auditors. Leslie Fay Companies may have been hiding something within the financial statements. It just seems kind of odd that the results do not flow completely through all of the years.

In 1991, the results show that either the company had a completely different year than the previous to make these results within the ratios. Or Leslie Fay Companies have been messing with their financials to receive a better audit grade. Therefore, the items on the financial statements that should have been a particular interest to BDO Seidman should have been those that have not followed the constant trend throughout the previous years, as I mentioned above in the ratio analysis.

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