Case 3 - Exercise 1

The Lakeside Company

Analytical Review Procedures
December 31, 2012

Prepared by:
Date:02/03/2021

Part A
Compute the financial ratios listed in Exhibit 3-2 for Lakeside for the years ended December 31, 2010 and December 31, 2011. Comment on any large
fluctuations, unusual fluctuations, or lack of expected fluctuations. Also, give an overall conclusion as to the significance of the change in Lakeside’s
liquidity, solvency, and profitability positions from 2010 to 2011. Use Case 3 – Exercise 1.xls for a spreadsheet to compute the ratios and the table
below.

Ratio 2010 2011 Comments

Current 1.35 1.35 No significant fluctuation, indicating a stable liquidity position.
Days to sell inventory 93.03 100.52 Little fluctuation, but mostly stable
Average collection period 20.63 24.71 No significant fluctuation, mostly stable
Debt-to-total assets 74.45% 75.53% Same ratio as before
Times interest earned 12.49 2.79 Long gap between ratios, showing unstable profit. Current year is facing issue as earnings
are low
Net profit margin 2.79% 2.27% Some fluctuation indicating almost stable position
Return on assets 8.47% 6.73% Reduced compared to previous year
Return on equity 33.17% 26.41% Reduced drastically compared to previous year indicating that company is not efficient
(compared to previous years) in generating income.
Overall Conclusion: Overall the performance in 2011 is weak compared to 2010.The liquidity position of company is almost same as
before. Times interest earned and return on equity and assets are the ratios with wide gaps.
Part B
Compare the year 2011 financial ratios computed for Lakeside above to the industry average ratios included in Exhibit 3-3. Comment on any large
fluctuations, unusual fluctuations, or lack of expected fluctuations. Also, give an overall conclusion as to the significance of the difference between
Lakeside’s liquidity, solvency, and profitability positions in 2011 and the industry average positions. Use the following format.

Ratio 2011 Industry Comments

Current 1.35 2.16 Lakeside is below the industry average. This may indicate short-term solvency problems

Days to sell inventory
Average collection period
Debt-to-total assets
Times interest earned
Net profit margin
Return on assets
Return on equity
Overall Conclusion:
100.52 69 days Lakeside is above industry average. This indicate that inventory is not managed properly
24.71 15 days Lakeside collection period is more than industry average. This indicate that company take
more time to receive the payments
74.5% 52.00% Lakeside is above industry average which tells us that the company is highly leveraged
2.79 9.16 times Lakeside is significantly lower than industry average. This tells us that the company is in
solvent compared to industry average.
2.27% 4.2% Lakeside is below industry average. This shows that the company is not able to control its
costs compared to industry average.
6.73% 8.1% Lakeside is below industry average which shows that the company is not effectively using
assets.
26.41% 19.3% Lakeside is above industry average which shows that there is increasing profits without
needing much capital.
The company can meet short term obligations. The company is behind in managing its assets and controlling costs.
However, the return on equity is high which shows profitability.
Part C
Scan each of the financial statements and the trial balances included in Exhibits 3-4 through 3-7 on Case 3 – Exercise 1.xls. Comment on any unusual
accounts, account balances, or large, unusual, or lack of expected fluctuations from the previous year. You should find at least 5 items. Use the
following format:

Source Finding Comments

(T/B, B/S, I/S or SCF)
Trial balance A debit balance appears in the “Allowance Uncollectible accounts may be increasing, or a debit entry may have
for Doubtful Accounts” account. been posted to AFDA by error.
Balance sheet There is increase in borrowings There could be liquidity issues and even interest expenses
Income statement Continuous loss from stores If there is huge losses for long, there are chances that company will
be discontinued
Cash flow Declines in operation If there is decline in operations, then there are chances of facing
solvency problems
T/B Rent expenses decreased Chances of acquiring property
T/B Repairs and maintenance A/c have This shows there could be a posting error
increased by 150%