The analysis of the Chipmunk’s Company financial statements revealed that there could be problems with the data. A financial ratio analysis was done by using liquidity ratios, inventory ratios, and profitability ratio. An analysis of financial ratios can be undertaken and compared to the industry average in the retail industry to reveal possible issues (Morales-Díaz & Zamora-Ramírez, 2018). The liquidity ratios analyzed were that of the current ratio and quick ratio. The current ratio for 2020 was 4.18, and 2019 was 2.53. The change in the current ratio was significantly high between the two years and should be investigated. The quick ratio was 0.75 for 2020 and 0.41 for 2019. The change in the quick ratio was also high and was to be investigated. The quick ratio was also higher than the industry average of 0.35 and was to be investigated.
Inventory ratios were investigated using the accounts receivable ratio, accounts receivable days ratio, and inventory turnover ratio. The accounts receivable ratio for 2020 and 2019 were 17.27 and 17.78 and were similar to the industry average of 23.42%. The accounts receivable days ratio was 0.047 and 0.048 for 2020 and 2019 and was relatively lower than the industry average of 15.58. The account receivable days was to be investigated. The inventory turnover ratio was 2.1 for 2020 and 1.85 for 2019. The value similar to that of the industry average showing that the values were okay.
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The profitability ratios were analyzed by examining the gross profit margin ratio and net profit margin ratio. The net profit margin ratio was 48.73% in 2020 and 38.47% in 2019. The values were similar to the industry average of 53.3%. The net profit margin ratio was 9.22% for 2020 and 1.85% for 2019. The values of 2020 were higher than normal and were to be investigated.
A further analysis of the given values in the balance sheet and income statement revealed that there were some problems. The values that were to be investigated were those that had a value higher than 30%. The specific values were the accumulated depreciation, line of credit, accounts payable and accrued liabilities, capital, sales and allowances, miscellaneous, property taxes, and income tax expense. An analysis of the given values should be undertaken to reveal a possible fraud.
References
Morales-Díaz, J., & Zamora-Ramírez, C. (2018). The impact of IFRS 16 on key financial ratios: a new methodological approach. Accounting in Europe , 15 (1), 105-133. https://doi.org/10.1080/17449480.2018.1433307
