Question

balance sheet and income statement							vertical analysis				Horizontal Analysis
ABC company							percentages		change in %		difference		percentage
				2015	2016		2015	2016	from year to year		2016-2015		base 2015
balance sheet							balance sheet				balance sheet
cash				460	300		22.12%	19.87%	2.25%		(160.00)		-35%
AR				620	480		29.81%	31.79%	1.98%		(140.00)		-23%
inventory				1000	730		48.08%	48.34%	0.27%		(270.00)		-27%
total assets				2080	1510		100%	100%	0.00%		(570.00)		-27%
account payable				580	310		27.88%	20.53%	7.35%		(270.00)		-47%
notes payable				500	100		24.04%	6.62%	17.42%		(400.00)		-80%
commmon stock				400	400		19.23%	26.49%	7.26%		0.00		0%
retained earnings				600	700		28.85%	46.36%	17.51%		100.00		17%
total liabilites and stockholderss equity				2080	1510		100.00%	100.00%	0.00%		(570.00)		-27%
income Statement							income statement				income statement
net sales				550	840		100%	100%	0.00%		290.00		53%
COGS				120	160		21.82%	19.05%	2.77%		40.00		-33%
gross margin				430	680		78.18%	80.95%	2.77%		250.00		58%
expenses							expense				expense
salaries				100	150		18.18%	17.86%	0.32%		50.00		50%
warehousing costs				80	120		14.55%	14.29%	0.26%		40.00		50%
advertising				60	90		10.91%	10.71%	0.19%		30.00		50%
taxes				45	75		8.18%	8.93%	0.75%		30.00		67%
total expenses				285	435		51.82%	51.79%	0.03%		150.00		53%
net income				145	245		26.36%	29.17%	2.80%		100.00		69%
what accounts would indicate there is fraud? Explain.

Answer 1

From the data provided we can see that notes payable as a percentage of total assets in 2015 stood at 24.04% and the percentage declined significantly in 2016 to 6.62%.

At the same time horizontal analysis indicates that notes payble in 2016 declined by as much as 80% compared to the notes payable figure in 2015.

Although this fall might be explainable through a correlation with falling levels of inventory we can see that inventory only falls by 27% in 2016 over the levels of 2015. Thus the high fall in notes payable in 2016 will have to be investigated and it should be determined whether the management has artificially reduced the amount of notes payable to make its debt equity ratio look better.