Earthwear Financial Statement Audit - Essay Example

? Earthwear Financial ment Audit EarthWear Company The company major sources of revenue are selling high quality clothing that is casual clothing shoes light luggage and accessories. To key customers who are clients mostly interested in the outdoor kind of activities. The entity major supplies are Asia Central America and Mexico. The organization has an organizational structure which clearly outlines the lines of authority in various departments. It is located in Boise Idaho United Kingdom Germany and Japan. Key assets are inventory property equipment and plant. The entities major liabilities are accounts payable and liabilities which accrue. The entity has no potential parties who are related to it. Other uses its credit to be able to meet all the normal financing duties. The company accounting financial condition and position is stable and good. There are no individual significant events and any transactions such as those of acquisitions or selling off subsidiaries entities or product line during the financial year. The entity does not have any key contingencies and uncertainties. The firm's business is seasonal and most of the company sales and profits are normally realized during each fourth of the quarter. The regulation in the environment does not expose the firm to any risk neither does the legal and political environment and social factors. Earthwears closest competitors include Patagonia Timberland and Eddie. The firm has enough suppliers hence no single supply can affect the operations of the company. What interests customers always keeps on changing hence the firm needs to stay competitive and respond to the demands that keeps on changing like responding to changes in technology. The entity makes use of the accounting principles. No one single individual or individuals is allowed to dominate management and decisions. Decision making is well guided by the organizational structure. Management normally consults with auditors on accounting issues which are new. The management is always willing to make adjustments of the financial statements for all misstatements that are material. Management gives very high priority to all internal control by issuing the management report on all financial statements .The management establishes and maintains all internal controls that normally initiate the records performs processing and later reports. The management is always responsive to all the recommendations from the auditor. Company policies regarding matters like acceptable business activities conflicts of all interests and conduct are established effectively. Management provides a code of ethics which guide what is right and wrong all dealings with customers are based on principle of honesty. All controls are documented by the management the company maintains an informal job description as well as formal containing the roles of each job. grwdThe management always determines the required skills and expertise needed for each role. And makes sure to proof this with evidence from employees. The management is only motivated to maximize the wealth f the shareholders and not to engage in any activities that may be fraudulent. The management shows and communicates all information regarding internal control and in the process of financial reporting non-financial management do not have excessive participation in the selection of the accounting principles or in the determination of estimates. Financial ratio analysis for Earth wears clothiers. Short-term liquidity ratios The liquidity ratios indicate the liquidity position of a company. They measure the ability of a company to meet its current liabilities as they fall due. Current ratios measure current assets against current liabilities this ratio must be 2:1 in the normal situation. But this ratio may be different for different firms. Other clothiers have a current ratio of 2.17 in 2012 unedited higher than the previous years this shows that either there was a misstatement which occurred because of overstating of revenues or expenses understatement. The current ratio for Earthwear clothiers was as follows; 2008=1.64, 2009=1.43.2010=1.92, 2011=1.94, 2012=2.17. The quick acid ratio relates to liquid assets. That is current assets less stock to current liabilities. This ratio must be 1:1 in normal situation. This ratio of 1:1 is usually considered an ideal and satisfactory. The acid ratios were as follows: 0.39, 0.44, 0.62, 0.53, 0.65 in 2008,2009,2010,2011 and 2012 respectively. The acid test ratio was at the highest in 2012 at 0.65. None of the years had a quicker ratio higher than one this means that the firms liquid assets are not sufficient in order to meet all the firm cash needs for paying their current liabilities. The operating cash flow ratio which measures cash flow from operations against current liabilities was highest in 2010 at 0.81 in comparison to 0.69 in 2008, 0.42 in 2009, 0.34 in 2011 and 0.40 in 2012. Activity ratios Activity ratios measure the efficiency of a firm in employing the available resources. The receivable turnover ratio was as follows 71.18 in 2008, 77.25 in 2009, 74.34 in 2011 and 75.41 in 2012 it was highest in 2009.The days outstanding in accounts receivable was 5.13,4.73,4.91,4.84 in 2008,2009,201,2011,2012 respectively greatest in 2008.The inventory turnover was 3.43,4.27,4.48,4.47,4.99 in 2008,2009,2010,2011,2012 respectively highest in 2012.The days of inventory on hand was 106.41,85.51,81.40,81.72,69.22 in 2008,2009,2010,2011,2012 respectively highest at 2008.Such ratios reflect the degree of effectiveness of assets utilization in the business activities where the ratio is at the highest it indicates the highest effectiveness. Profitability Performance Ratios Profit has always been considered as main indicator of successful business. These ratios indicate the degree at success in achieving profit levels. The gross percentage ratios were as follows 44.95% in 2008, 44.91% in 2009, 44.89% in 2010, 42.51% in 2011 and 42.49% in 2012.The margin of sales price compared to factory cost or bought cost as highest in 2008 at 44.95%.The profit margin ratio was 2.34%,3.61%,3.64%,2.37%.3.02% in 2008,2009,2010,2011,2012 respectively. The margin of the net income compared to the net sales was greatest in 2009.The return on asset ratio measures the return on the proprietors investment in the company. The ratio was as follows 14.80%, 6.84%, 10.53%, 6.83%, 4.69% in 2008, and 2009,2010,2011,2012 respectively. Highest in 2010.Return on equity measures the degree return on net income to total owner’s equity. The ratios were as follows, 26.43%, 12.86%, 16.22%, 11.03%.5.92% in 2008, 2009,2010,2011,2012 respectively. Greatest at 2008. Coverage Ratios Coverage ratios measure the contribution of financing by owners compared with the financing provided by the firm’s creditor. The debt to equity ratio shows the relationship between the owner’s funds and the borrowed funds. The larger the portion of funds provided by owners the less risks is assumed by creditors. The ratio was as follows 0.79 in 2008, 0.88 in 2009, 0.58 in 2010, 0.61 in 2011 and 0.51 in 2012.Highest in 2009.The times interest earned ratio measures the net income plus interest expense against interest expense. The ratios were as follows 53.88, 26.31, 26.41, 23.92, 10.19 in 2008, and 2009,2010,2011,2012 respectively highest in 2008. Root issues             Market share Earthwear has 3.5 million dollars shares common stock to be issued or that may be offered pursuant for the practice of options given by the Company’s stock option strategy. Options are given at the permission of committee group of the entities board directors to the officers and specific employees in the Company. No option is allowed to exercise price lower than the market fair value per every share of all the common shares stock on the date when they are granted. Customer satisfaction The Company tries to provide good, high and quality goods or products at very reasonable prices. EarthWear Company has a very strong commitment for excellence in client service and a well given guarantee. The entity is also aware of all its environmental issues and responsibilities. All firm facilities are insulated, or recycled, under conserved power. The Company regularly checks the environmental consequence of all its products. The firm believes its customers share the concern for their environment. Desirable/popular product lines Earth Wear Clothiers make high and quality clothes for outdoor events and sports, like hiking, fly-fishing. Skiing and white-water kayaking. Corporate Viability The firm has enough suppliers hence no single supply can affect the operations of the company. What interests customers always keeps on changing hence the firm needs to stay competitive and respond to the demands that keeps on changing like responding to changes in technology. The entity makes use of the accounting principles. No one single individual or individuals is allowed to dominate management and decisions. Management concepts and solutions Market share The firm has restricted shares award plan. Under the guidance of the plan. A committee of the entity board may give shares of the firm’s common shares stock to its officers and specific key employees. Such stock shares given over ten-year duration on a straight-line accounting basis. The giving of this award has always been documented as compensation based on the market fair value of the stock shares at the date of the giving. Compensation expense in these plans is registered as shares given (Puttick, Van & Kana, 2007). Customer satisfaction, The Company tries to increase all sales by increasing its client’s base and by raising sales to current customers through well improved product price offerings. Second, the entity tries to create more sales by aiming at mailings of special sales of its market and by giving its products through its web page. The Company also is trying additional chances to expand its client’s database a key factor in the firms success has been always the creation of its own list of clients. Popular product lines EarthWear puts more effort on all clothing and any other products that normally are aimed at clients interested outside activities. The firm’s products are fashioned and normally quality crafted in order to meet the dynamic tastes and preferences of the entity clients rather than copy the dynamic fashions of the common fashion world. Corporate viability The company major sources of revenue are selling high quality clothing that is casual clothing shoes light luggage and accessories. To key customers who are clients mostly interested in out door kind of activities. Strategic Planning Trends, The entity business is very seasonal. Previously, disproportionate amount of the firms net sales and almost all of its profits have been recognized in the fourth quarter (Dauber, 2009). If the firm’s sales were materially not same from seasonal in the fourth quarter, the entity yearly operations could be materially be affected. Also, results for the specific individual quarters would not necessarily show results that are to be received annually. Income, Earthwear registers income during shipment for catalog and electronic-commerce sales and at the point of all sales for stores. The entity provides reserves for all returns. Expense, The firm expenses the costs of all advertising for the magazines, television, and radio, and any other media at commencing or the very first time that the advertising happens, except for all direct advertising, which is always capitalized and amortized in its expected time of future rewards. Direct and response advertising consists of primarily catalog in production and all mailing costs, which are normally generally amortized within the three months when catalogs, are mailed. Earning per share Earthwear currently is allowed to issue 70 million stock shares of $0.01 par value of common stock. For the Treasury Stock the firm’s board of directors authorized the buying of a total of 12.7 million stock shares of the Company’s common share stock. Forecast of future issues There is no high turnover of board members, senior managers and counsels. There are no strained relationships between the current and the previous auditor with the management nor disputed. There is no known history of law securities violations against the firm or management in relation to fraud. Board of directors ensures that the firm objectives are in line with major stakeholders. The audit committee makes sure there is direct communications with internal and external auditors and have adequate resources. All this is proved by minutes of the meeting regular meetings and appointment of qualified members. Erathwear has set objectives which state what they desire to accomplish. The firm has a risk analysis type of process which is used to analyze uncertainties. All the objectives of the firm are well written communicated and monitored. All the different levels of managers adequately monitor all variances. Management has well established procedures to prevent any unauthorized access of information and data files. The organization is clearly defined by lines of authority communication and responsibility. The structure is appropriate. There are well established policies for development of the structure. The information is centralized for easy access. There is clear responsibility assignment to all employees which are well communicated, with adequate computer systems to show all controls and proper documentation with proper systems for measuring performance. The key indicators of performance are return of equity, inventory turnover, return on assets, gross profit margin which is benchmarked against the industry. The company also considers analysts reports the information system gives all relevant information and is sufficient and well communicated. The firm has internal audit and all recommendations by the internal and external auditors are followed (Dauber, 2009). Conclusion EarthWear markets good quality clothes for all outside sports, like shoes casual clothing, accessories and soft luggage. The firm manages its operations in three business segments consisting of the core, business to business. The firm’s main market is United States; other markets also include Europe, Canada, and Japan. The making of financial statements in accordance with GAAP (generally accepted accounting principles) requires the board to make estimates and conclusions that always affect all the reported findings of amounts of assets plus liabilities and all disclosure of all contingent assets plus liabilities at the period of the financial statements and the documented amounts of revenues plus expenses during the disclosure periods. Actual results prolly may be different from the estimates. The preparations of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results may differ from these estimates. References Puttick, G., Van, E. S. D., & Kana, S. P. (2007). The principles and practice of auditing. Lansdowne [South Africa: Juta. Dauber, N. A. (2009). The complete guide to auditing standards, and other professional standards for accountants, 2009. Somerset, N.J: Wiley. Gibson, Charles H. (2012). Financial Reporting and Analysis + Thomsonone Printed Access Card. South-Western Pub. Read More