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without explanation but calculations Horizontal Analytical Procedures

Baumholder & Barbar, CPAs, audited the consolidated financial statements of Aladdin Company $($a nonissuer$)$ for the year ended December $31,$ Year $1,$ and expressed a qualified opinion.

Baumholder & Barbar also audited Aladdin's financial statements for the year ended December $31,$ Year $2,$ and is worried they may have to express a modified opinion as Aladdin appears to be having a major problem keeping its bills paid and its inventory sold. The following consolidated financial statements were presented on a comparative basis with those of the prior year.

Aladdin, Co$.$

Comparative Balance Sheets

December $31,$ Year $2$ and Year $1$

Year $2$ Year $1$

Assets

Current assets

Cash and cash equivalents $$100,000$ $$750,000$

Receivables $200,000400,000$

Inventory $100,000100,000$

Prepaids $25,000100,000$

Total current assets $425,0001,350,000$

Property, plant, and equipment $-$ net $200,000200,000$

Other assets $100,000350,000$

Total assets $$725,000$ $$1,900,000$

Liabilities and Stockholders' Equity

Current liabilities

Accounts payable $$150,000$ $$100,000$

Current portion of long$-$term debt $200,000400,000$

Total current liabilities $350,000500,000$

Long$-$term debt $100,0001,000,000$

Total liabilities $450,0001,500,000$

Stockholders' equity

Common stock $50,00050,000$

Retained earnings $225,000350,000$

Total stockholders' equity $275,000400,000$

Total liabilities and stockholders' equity $$725,000$ $$1,900,000$

Cost of goods sold for Year $1$ and Year $2$ is $$600,000$ and $$175,000,$ respectively. Average inventory for Year $1$ is $$125,000.$

Part $1$:

You are the assistant on the engagement. The engagement supervisor is worried that Aladdin is not a going concern and has asked you to calculate the following ratios. He has also asked you to analyze the ratios.

In the table below, calculate the following ratios using the information above. Round to the nearest decimal place $($e$.$g$.,2\mathrm{.}5,10\mathrm{.}0).$

Year $1$ Year $2$ Industry

Standard

Acid$-$Test Ratio $5\mathrm{.}0$

Current Ratio $6\mathrm{.}5$

Inventory Turnover $10\mathrm{.}0$

Debt$-$to$-$Equity Ratio $0\mathrm{.}5$

Equity Ratio $0\mathrm{.}7$

A horizontal analysis involves a review of the client$$s ratios and trends over time. Specifically, the auditor is looking at change over time. In the table below, select the correct answer for each question.

Question Answer

$1.$ The horizontal analysis of the acid$-$test ratio would most likely tell you what?

$2.$ The horizontal analysis of the current ratio would most likely tell you what?

$3.$ The horizontal analysis of the inventory turnover ratio would most likely tell you what?

$4.$ The horizontal analysis of the debt$-$to$-$equity ratio would most likely tell you what?

$5.$ The horizontal analysis of the equity ratio would most likely tell you what?

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