EarthWear Hands-on Mini-case Chapter 3 - Client Acceptance © The McGraw-Hill Companies, Inc., 2014
In this mini-case "o# will #se %illis an! A!ams& client acceptance'contin#ance $orms to e(al#ate the contin#ance !ecision $or )arth%ear as an a#!it client. *ne o$ the most important wa"s acco#ntin+ $irms mana+e their ris is " ein+ (er" care$#l ao#t which companies the" !eci!e to associate with as clients. In the $irst "ear, that !ecision is re$erre! to as the client acceptance !ecision. In each s#se#ent "ear, $irms !eci!e whether to contin#e their association with each client. This s#se#ent !ecision process is re$erre! to as the contin#ance !ecision. The $actors that $irms consi!er $or the contin#ance !ecision are #s#all" (er" similar to those consi!ere! $or the initial acceptance !ecision.
INSTRUCTIONS:
1
/ea! the ac+ro#n! in$ormation on )arth%ear to prepare to e(al#ate the compan" as a contin#in+ a#!it client. To open the ac+ro#n! !oc#ment please !o#le-clic on the $ollowin+ icon a !oc#ment will open in Microso$t %or!.
2
/e(iew )arth%ear&s #na#!ite! 2014 $inancial statements incl#!in+ the alance heet, Income tatement, an! Cash low worsheets to otain a etter #n!erstan!in+ o$ the client an! to assess its c#rrent $inancial con!ition. A senior a#!itor $rom "o#r $irm has alrea!" calc#late! some $inancial an! in!#str" ratios to help with the contin#ance !ecision. Compare )arth%ear&s ratios to the in!#str"
3-1
E!RTHWE!R C"OTHIERS C#ient Contin$ance E%a#$ation December 31, 2014
SAA
1'3'2016
General "e&a# Na'e: !ddress: Cit): Te#e/hone: Co$ntr): Entit) T)/e: Nat$re o $siness:
)arth%ear Clothiers, Inc. 2@36 =. 8e(lin A(e. oise 20; 666-3242
(isca# )ear-end *MM+,,:
12'31
I8 .i/: 20; 666-3241
9:443
State: (a0:
)arth%ear pro!#ces hi+h-#alit" clothin+ $or o#t!oor sports, s#ch as hiin+, siin+, $l"-$ishin+, an! whitewater a"ain+. *(er the "ears, the compan"&s pro!#ct lines ha(e +rown to incl#!e cas#al clothin+, accessories, shoes, an! so$t l#++a+e. )arth%ear o$$ers its pro!#cts thro#+h three retailin+ optionsB catalo+s, retail o#tlets, an! its wesite. Inte+rate! A#!it Ser%ices Re$ired: =A8A> 8$7#ic: es Tic9er S)'7o#: )%CCDDDDDDDDDDDDDDDD E0chan&e: Re%en$e *;s: ?1,01:,;:0DDD !ssets *;s: ?3;:,42;DDD Net Worth *;s: ?2@0,4@@DDD ?;@6,000 Esti'ated net ees: ?:@2,600 $d a$dit hrs std rate: Rea#i6ation: ;:.;9 Net Re%en$e /er ho$r: ?232 ,escri7e /ro/osed ee arran&e'ents: i7e! $ee arran+ement Ti'in& o ser%ices to 7e /eror'ed: 5eaDDDDDDDDDDDDDDDDDDDDDD
© The McGraw-Hill Companies, Inc., 2014
E!RTHWE!R C"OTHIERS C#ient Contin$ance E%a#$ation December 31, 2014
3-2 SAA
1'3'2016
Other Characteristics S$7-/ri'e #endin& o/erations: elect t"pe o$ operationB A !i(ision o$ a re+#late! $inancial instit#tion
=o
A commercial entit" that sells all loans it ori+inates
=o
A commercial entit" that retains all or a portion o$ the loans it ori+inates
=o
Se#ect a## that are a//#ica7#e: Compan" plans to +o p#lic or raise si+ni$icant e#it"E
=o
8oes the compan" inten! to +o p#lic #sin+ a ac-!oor re+istrationE
=o
Contin+ent $ee arran+ementE
=o
Ins#re! !epositor" or instit#tionE
=o
Is the instit#tion s#Fect to a cease an! !esist or!erE
=o
Has the instit#tion entere! into a memoran!#m o$ #n!erstan!in+ with a re+#lator" a+enc"E
=o
Ins#rance compan" li$e propert" an! cas#alt"E
=o
3-3
E!RTHWE!R C"OTHIERS C#ient Contin$ance E%a#$ation December 31, 2014
SAA
1'3'2016
Management
oard o ,irectors Tit#e: Chairman A#!it Comm. Chair
Na'e: ames G. %illiams Gar" Amle
Ho'e Cit): oise oise
Ho'e State: I8 I8
O
oise oise oise
I8 I8 I8
0 0 0
ac9&ro$nd >eriication: es es
es es es
?e) Mana&e'ent C)* C* Acco#ntin+ *$$icer
Cal(in . /o+ers ames C. C %atts Carol Mca"
Outside Advisors 8ri'ar) "a< (ir' Na'e: !ddress:
Te#e/hone: Contact:
eon, eon J 8alton :6; .%. 99th A(en#e oise, I8 9:443
8ri'ar) an9in& Re#ationshi/ irst =ational an Na'e: 5.*. o7 1:49 !ddress: oise, I8 9:443
20; 626-@11: 8a(i! eon
Te#e/hone: Contact:
20; 643-6@9; Harmner
E!RTHWE!R C"OTHIERS C#ient Contin$ance E%a#$ation December 31, 2014
3-4 SAA
1'3'2016
Background Investigation Overview The irm re#ires ac+ro#n! in(esti+ations $or all clients. #Fects o$ the ac+ro#n! in(esti+ations incl#!e the clients an! e" !ecision maers. e" !ecision maers are normall" the compan"&s oar! an! a#!it committee i$ applicale chairs, chie$ e7ec#ti(e o$$icer, chie$ $inancial o$$icer an! principal acco#ntin+ o$$icer, #t sho#l! also incl#!e si+ni$icant principal in(estors, sharehol!ers or others who e7ercise si+ni$icant in$l#ence o(er compan" operations. i+ni$icant compan" relate! entities an!'or s#si!iaries sho#l! also e consi!ere! as a!!itional s#Fects.
Se#ect ro' the o##o
es
ac+ro#n! in(esti+ations ha(e taen place $or an" newl" hire! e" !ecision maers.
es
A thoro#+h ac+ro#n! in(esti+ation has een complete!.
es
S$''ari6e the res$#ts o the in%esti&ation 7e#o<: In 1:::, )arth%ear&s (ice presi!ent o$ $inance, 8on )(ans, was char+e! with a mis!emeanor in(ol(in+ ille+al +amlin+ on local colle+e asetall +ames. Char+es were later !roppe! in ret#rn $or Mr. )(ans a+reein+ to pa" a $ine o$ ?960 an! per$orm 60 ho#rs o$ comm#nit" ser(ice. =o other ille+al or ethical prolems were $o#n! with an" other )arth%ear e7ec#ti(e.
© The McGraw-Hill Companies, Inc., 2014
Name: Class:
E!RTHWE!R C"OTHIERS C#ient Contin$ance E%a#$ation ,ece'7er 31A 214
General Risk Indicators Instr$ctions: E%a#$ate and ans
I )o$ se#ected ;es; on an) o the $estions to the #etA /ro%ide and e0/#anation 7e#o<:
Are there an" concerns ao#t #n!#e reliance ein+ place! on the res#lts o$ o#r worE i.e. sale o$ the compan", $inancin+
No
8oes the client ha(e an" associate! entities that are not a#!ite! or are ein+ a#!ite! " $irms o#tsi!e o$ %illis an! A!amsE
No
Please select an answer from the drop down menu in the cell on the left
Ha(e an" sit#ations een note! that ear on the inte+rit" o$ mana+ementE
Please select an answer from the drop down menu in the cell on the left
Is there e(i!ence that the #siness is $inanciall" !istresse!E Is the client imposin+ on #s an" #nreasonale scope or timin+ restrictionsE
No
Is the client&s in!#str" or #siness characterie! " si+ni$icant operatin+, economic, pro!#ct, o$ other commercial risE )7amples o$ s#ch riss incl#!eB !e(elopment or start-#p sta+e, hi+h ris in!#str", an in!#str" with relati(el" short pro!#ct li(es, or pro!#cts o$ #nnown or !o#t$#l commercial $easiilit".
No
Are there an" pen!in+ en$orcement matters or other in(esti+ations the o#tcome o$ which co#l! a!(ersel" impact the (iailit" or rep#tation o$ the #sinessE
No
Has the in$ormation +atherin+ process raise! concerns ao#tB #n#s#al or contentio#s acco#ntin+ policies, a#!itin+ proce!#res, internal controls, reportin+, proper acco#ntin+ recor!s, ta7 or re+#lator" mattersE
Are there an" e7ternal con!itions or tren!s that ma" ha(e a si+ni$icant impact on the client, s#ch as chan+es in #"ers, chan+es in s#ppliers, or new competitorsE
No
No
3-6 Initial Here
2'2;'2016
1-1
E!RTHWE!R C"OTHIERS Conso#idated a#ance Sheets (In thousands)
PBC
12'31'2014 8ecemer 31
!ssets C$rrent !ssets: Cash an! cash e#i(alents /ecei(ales, net In(entor" 5repai! a!(ertisin+ *ther prepai! e7penses 8e$erre! income ta7 ene$its Total c#rrent assets 8ro/ert)A /#ant and e$i/'entA at cost an! an! #il!in+s i7t#res an! e#ipment Comp#ter har!ware an! so$tware easehol! impro(ements Total propert", plant an! e#ipment ess - acc#m#late! !epreciation an! amortiation 5ropert", plant an! e#ipment, net Intan+iles, net Total assets "ia7i#ities and shareho#der;s in%est'ent C$rrent #ia7i#ities: ines o$ cre!it Acco#nts pa"ale /eser(e $or ret#rns
214 *$na$dited
213
212
DFA35F DGA43 D14AF3 D1A212 D5A435 D1A33G D21AG
?4;,:9; ?12,;96 ?122,339 ?11,46; ?@,316 ?9,132 ?20:,0:6
?4:,@@; ?11,63: ?106,426 ?10,992 ?3,9;0 ?@,:30 ?1;;,116
DA5 DGA32 D5A4 D3A144 D223A3 DFA22 D12A14 D1A34 D3GFA42G
?90,:1; ?@9,613 ?@4,:;@ ?3,010 ?20@,42@ ?;6,:;@ ?120,440 ?423 ?32:,:6:
?@@,;04 ?@@,;9@ ?49,4@@ ?2,;:4 ?1;4,040 ?9@,26@ ?109,9;4 ?@2; ?2:@,629
D1A51 D54A1G DA1
?11,011 ?@2,60: ?6,;:0
?9,@21 ?4;,432 ?6,116
1-2
E!RTHWE!R C"OTHIERS Conso#idated State'ents o O/erations (In thousands, except per share data)
PBC
12'31'2014
or the perio! en!e! 8ecemer 31
Net Sa#es Cost o$ sales Gross 5ro$it ellin+, +eneral an! a!ministrati(e e7penses =on-rec#rrin+ char+e cre!it Inco'e ro' o/erations *ther income e7penseB Interest e7pense Interest income Gain on sale o$ s#si!iar" *ther Total other income e7pense, net Income e$ore income ta7es Income ta7 pro(ision Net inco'e asic earnin&s /er share ,i#$ted earnin&s /er share asic wei+hte! a(era+e shares o#tstan!in+ 8il#te! wei+hte! a(era+e shares o#tstan!in+
© The McGraw-Hill Companies, Inc., 2014
214 *$na$dited D1A1FAGF D52A153 D44A3 D34A1G
?:60,4;4 ?64@,3:3 ?404,0:1 ?3@4,012
D3A55
?40,92:
?;69,;;6 ?492,93: ?3;6,14@ ?334,::4 ?1,163 ?61,306
*DGG DFGF
?:;3 ?1,46:
?1,22: ?693
*D3A514 *D3A43 DA154 D2A5G D43A4F5 14G 145 1FA15F 1FA4G5
?4,9:; ?4,322 ?36,969 ?13,230 ?22,629 1.16 1.14 1:,631 1:,994
?1,0:1 ?1,949 ?4:,66: ?1;,339 ?31,222 1.@0 1.6@ 1:,666 20,066
213
212
E!RTHWE!R C"OTHIERS Conso#idated State'ents o Cash (#o
1-3 PBC
12'31'2014 or the perio! en!e! 8ecemer 31
Cash #o
214 *$na$dited D43A4F5
213
212
?22,629
?31,222
D1A515 D42 *D4A33
?16,231 ?96 ?3,340
?1,163 ?13,4@6 ?103 ?6,39@
D1A5G
?2;4
?@02
D4A232 *D25A35 D1A24 *DG1G *DGA323 D21 D5A52 D1A5 DA34 D4AFF *D1A44 D4AG
?1,33@ ?1@,:12 ?@;@ ?2,634 ?14,09; ?996 ?90: ?2@2 ?1,:23 ?1,42: ?2,144 ?3:,3@9
?2,1@6 ?39,390 ?3,110 ?1,162 ?;,91; ?43: ?4,:;2 ?32; ?2,;10 ?1,9@6 ?439 ?9:,;91
*D2A334
?2;,:6:
?1;,20;
E!RTHWE!R C"OTHIERS Ratio !na#)ses ,ece'7er 31A 214
6-1 SAA
1'3'2016 8ecemer 31
21
211
212
213
214
*!$dited *!$dited *!$dited *!$dited E0/ected
214 !ct$a# #na#!ite!
,ierence ro' E0/ected
Ind$str) !%era&e
,ierence *ro' 214
SHORT-TERM "I@UI,IT R!TIOS: C$rrent Ratio c#rrent assets ' c#rrent liailities
1.@4
1.43
1.:2
1.;0
1.:4
21
0.23
2.10
0.09
@$ic9 Ratio li#i! assets ' c#rrent liailities
0.3:
0.44
0.@2
0.63
0.@6
3
0.0;
0.;0
-0.09
O/eratin& Cash (#o< Ratio cash $low $rom operations ' c#rrent liailities
0.@:
0.42
0.;1
0.34
0.40
4
0.00
='A
='A
91.1;
99.26
94.34
93.;2
96.41
11G
42.@0
='A
='A
,a)s O$tstandin& in !cco$nts Recei%a7#e 3@6 !a"s ' recei(ales t#rno(er
6.13
4.93
4.:1
4.:4
4.;4
3F
-1.94
14.10
-11.01
In%entor) T$rno%er cost o$ sales ' in(entor"
3.43
4.29
4.4;
4.49
4.::
3G
-1.12
@.20
-2.33
[email protected]
;6.61
;1.40
;1.92
@:.22
F4FF
26.9;
6;.90
[email protected]:
ross 8roit 8ercenta&e +ross pro$it ' net sales
44.:6
44.:1
44.;:
42.61
42.4:
43F=
1.41
3;.;0
6.10
8roit Mar&in net income ' net sales
2.34
3.@1
3.@4
2.39
3.02
42=
1.24
3.30
0.:@
Ret$rn on !ssets net income ' total assets
14.;0
@.;4
10.63
@.;3
4.@:
111=
@.4;
9.40
3.99
Ret$rn on E$it) net income ' total owners& e#it"
[email protected]
12.;@
[email protected]
11.03
6.:2
1=
10.9;
19.60
-0.;0
0.9:
0.;;
0.6;
0.@1
0.61
5
-0.01
0.;4
-0.34
63.;;
[email protected]
[email protected]
23.:2
10.1:
55
40.3;
='A
='A
!CTI>IT R!TIOS: Recei%a7#es T$rno%er net sales ' net en!in+ recei(ales
,a)s o In%entor) on Hand 3@6 ' cost o$ sales ' in(entor" 8RO(IT!I"IT + 8ER(ORM!NCE R!TIOS:
CO>ER!E R!TIOS: ,e7t to E$it) total liailities ' sharehol!ers& in(estment Ti'es Interest Earned net income N interest e7pense ' interest e7pense
O )7pecte! (al#es are otaine! " #sin+ the $orecast $#nction in )7cel #sin+ the row o$ !ata $rom 2012 an! 2013 to otain the e7pecte! (al#e $or 2014.
J In!#str" o#rceB 8#n J ra!street 8J. The me!ian (al#es o$ the in!#str" ratios are #se! $or comparison p#rposes. or ratios not speci$icall" incl#!e! on 8J, ratios were calc#late! $rom a(era+e $inancial statement !ata pro(i!e!. N+! P not a(ailale or co#l! not e calc#late! $rom $inancial !ata.