Chapter Problem 5-39 Ratio/Trend Analysis Compared to Industry Arthur, CPA, is auditing The Home Improvement Store as of December 31, 2016. As with all audit engagements, Arthur's initial procedures are to analyze the entity's financial data by reviewing trends in significant ratios and comparing the company's performance with the industry so that he better understands the business and can determine where to concentrate his audit efforts. As part of Arthur's audit of The Home Improvement Store, he performed analytical procedures by calculating the following ratios and obtaining related industry data. The Home Improvement Store Industry 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 Quick ratio 0.67 0.73 1.38 0.45 0.29 0.79 0.81 0.07 091 1.08 Days of laventory on hand 62.73 75.15 12.40 84.02 80.52 82.26 79.89 86.06 84.13 75.04 Inventory current assets 53.48% 45.51% 48.42% 62.28% 80.91% 58.04% 56.44% 60.19% 60.92% 50.33% Return on assets 16.10% 9.75% 5.70% 2.16% 6.05% 6.98% 8.87% 7.05% 5.06% 11.73% Debt to equity 0.02 0.07 1.47 236 0.72 0.44 0.31 0.56 0.53 0.57 Required: Compare The Home Improvement Store's ratios with those of its industry. You may want to reference the advanced module in this chapter for more information regarding the ratios used in the analytical procedure. For each ratio provided in the table above a. Indicate the potential risks the ratio and/or historical patterns may present.. b. Indicate one or two plausible explanations for why The Home Improvement Store's ratios or historical patterns differ from those of the industry. Page 1

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Chapter1: Financial Statements And Business Decisions
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Chapter
Problem 5-39 Ratio/Trend Analysis Compared to Industry
Arthur, CPA, is auditing The Home Improvement Store as of December 31, 2016.
As with all audit engagements, Arthur's initial procedures are to analyze the
entity's financial data by reviewing trends in significant ratios and comparing the
company's performance with the industry so that he better understands the
business and can determine where to concentrate his audit efforts. As part of
Arthur's audit of The Home Improvement Store, he performed analytical
procedures by calculating the following ratios and obtaining related industry
data.
The Home Improvement Store
Industry
2012
2013
2014
2015
2016
2012
2013
2014
2015
2016
Quick ratio
0.67
0.73
1.38
0.45
0.29
0.79
0.81
0.07 091
1.08
Days of laventory on hand
62.73
75.15
12.40
84.02
80.52
82.26
79.89
86.06
84.13 75.04
Inventory current assets
53.48%
45.51%
48.42%
62.28%
80.91%
58.04%
56.44%
60.19%
60.92% 50.33%
Return on assets
16.10%
9.75%
5.70% 2.16%
6.05%
6.98%
8.87%
7.05%
5.06% 11.73%
Debt to equity
0.02
0.07
1.47
236
0.72
0.44
0.31
0.56
0.53 0.57
Required:
Compare The Home Improvement Store's ratios with those of its industry. You
may want to reference the advanced module in this chapter for more
information regarding the ratios used in the analytical procedure. For each
ratio provided in the table above
a. Indicate the potential risks the ratio and/or historical patterns may present..
b. Indicate one or two plausible explanations for why The Home Improvement
Store's ratios or historical patterns differ from those of the industry.
Page 1
Transcribed Image Text:Chapter Problem 5-39 Ratio/Trend Analysis Compared to Industry Arthur, CPA, is auditing The Home Improvement Store as of December 31, 2016. As with all audit engagements, Arthur's initial procedures are to analyze the entity's financial data by reviewing trends in significant ratios and comparing the company's performance with the industry so that he better understands the business and can determine where to concentrate his audit efforts. As part of Arthur's audit of The Home Improvement Store, he performed analytical procedures by calculating the following ratios and obtaining related industry data. The Home Improvement Store Industry 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 Quick ratio 0.67 0.73 1.38 0.45 0.29 0.79 0.81 0.07 091 1.08 Days of laventory on hand 62.73 75.15 12.40 84.02 80.52 82.26 79.89 86.06 84.13 75.04 Inventory current assets 53.48% 45.51% 48.42% 62.28% 80.91% 58.04% 56.44% 60.19% 60.92% 50.33% Return on assets 16.10% 9.75% 5.70% 2.16% 6.05% 6.98% 8.87% 7.05% 5.06% 11.73% Debt to equity 0.02 0.07 1.47 236 0.72 0.44 0.31 0.56 0.53 0.57 Required: Compare The Home Improvement Store's ratios with those of its industry. You may want to reference the advanced module in this chapter for more information regarding the ratios used in the analytical procedure. For each ratio provided in the table above a. Indicate the potential risks the ratio and/or historical patterns may present.. b. Indicate one or two plausible explanations for why The Home Improvement Store's ratios or historical patterns differ from those of the industry. Page 1
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