a. Assume that all sales (use “Net Sales”) are made on account. Were there more credit sales or cash collections of credit sales during 2011?
b. Assume that all inventory purchases—which you must calculate—are made on account, and further assume that inventory is the onlytransaction which Amazon.com pays for on credit. Was there a greater amount of purchases or cash payments made on account during 2011?
Complete an industry analysis.
Requirement 7:
7. You have recently been hired as a new staff auditor with the CPA firm of Smith & Jones (SJ), LLC. The partners in the firm are looking for ways to hold down the costs of their audits in an effort to improve profits. To do so, they want to make heavier use of analytical review procedures, whereby key ratios for an audit client would be compared to summary ratios for a larger group of similar companies or an entire industry. This would allow the firm to cut back on some of their detailed (and costly) audit testing. For example, a particular audit client’s debt ratio (i.e., total liabilities/total assets) could be computed, and this ratio could then be compared to the mean and/or median ratio for the entire industry in which the client operates. If the audit client’s debt ratio is in line with the industry mean and/or median, the auditor would have an increased sense of comfort about this company’s level of debt and, thus, could reduce their audit testing in relation to debt or liabilities for this client. However, if the audit client’s debt ratio is markedly different (i.e., either significantly larger or smaller) than the industry mean and/or median debt ratio, the auditor would need to expand the audit testing of the accounts making up total liabilities for this client to ascertain why its debt ratio deviates significantly from the summary measures for the industry.
SJ has just obtained a new client, Amazon.com. Before beginning the year-end audit of Amazon’s financial records, the SJ partners would like to obtain several key ratios for the companies operating in this industry that could be used in the analytical review procedures for the Amazon audit.
Determine the 2011 summary measures (i.e., means and medians) for the following ratios for companies in this industry:
· Current ratio = Current assets / Current liabilities = ACT/LCT
· COGS ratio = COGS / Sales revenue = COGS/ SALE
· Asset turnover = Sales revenue / Total assets = SALE/AT
· Return on investment = Net income / Total assets = NI/AT
· Debt ratio = Total liabilities / Total assets = LT/AT
· Cash flows from operations ratio = Net cash flow from operating activities / Sales revenue = OANCF/SALE
· Net property, plant, & equipment ratio = net property, plant, & equipment/Total assets = PPENT/AT
· Times interest earned = Earnings before interest and taxes/Total interest and related expense = EBIT/XINT