Laramie Wire Essay

1249 WordsMay 6, 20125 Pages
Question 1:  Percentage Change in Average Days Sales in Receivables: (56.3-48.4)/48.4 = 16.32%. There was an increase of 16.32% from 2007 to 2008, meaning that the company is slower in collecting its receivables, while the percentage change in sales increased by (8,450,000-8,150,000)/8,150,000 = 3.68% in the same period. This could be because they have changed their receivables' collection policy by giving more time to its customers to pay. Also, the receivables might have increased because of some inflated sales (fictitious sales or improper revenue recognition in order to make the company appear profitable while it is not), or, at the contrary, sales are understated because collection period has increased so we can suppose that sales should have been greater. Thus, the auditor has to verify the reason behind this large increase. These issues relate to existence concerning receivables and valuation assertion for the collection period.  Percentage Change in Sales and Cost of Goods Sold: Percentage change in sales increased by (8,450,000-8,150,000)/8,150,000 = 3.68% and percentage change in COGS increased by (6,242,500-6,080,000)/6,080,000 = 2.67% for the period 2007 – 2008. Laramie Wire Manufacturing could be producing more in order to decrease the cost associated with products’ manufacturing (achieving economies of scale). Also, the increase in sales can be due to an increase in sales’ prices. These ratios appear to be reasonable because if sales increase, we can suppose that COGS will increase as well.  Gross Profit Percentage: For 2007, the gross profit was 8,150,000-6,080,000 = 2,070,000 and for 2008 it was 8,450,000-6,242,500 = 2,207,500. Gross margin for 2007 was (2,070,000/8,150,000)*100 = 25.4% which increased in 2008 to (2,207,500/8,450,000)*100 = 26.1%. Thus, the percentage change in gross profit increased by (2,207,500-2,070,000)/2,070,000 =

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