Crazy Eddie Case

1. Compute key ratios for period 1984-1987 1984 1985 1986 1987 Current .93 1.56 1.40 2.41 A/R turnover 52.7 49.8 116.8 32.5 Inventory turnover 4.58 3.9 3.25 2.5 Debt-to-equity 4.9 1.75 1.98 2.16 Efficiency 3.75 2.08 2.07 1.2 GM% .22 .24 .26 .23 Return on assets .21 .19 .2 .06 Red Flags The Inventory turnover rate steadily declines from 1984-87, which could indicate, lost sales. Misstatements of inventory or cost of goods sold could be possible. It also indicates employee strikes or, in Crazy Eddies’ case, employees leaving their jobs. In 1986 the A/R turnover rate was extremely high which is unusual because in that year the …

…earnings from operations which came to be $18,927,00. I felt that 20% of this amount would be considered material $18,927,000*20%= $3,785,400 Tolerable misstatement for each account can not exceed: 60%* $3,785,400 = $2,271,240 Sum of tolerable misstatement: 2 * $3,785,400 = $7,570,800 Allocation: Current Assets Cash $110,000 Short term investments 0 Receivables 2,271,240 Merchandise inventories 2,271,240 Prepaid Expenses 0 PP&E 110,000 Other Assets 110,000 Current Liabilities Accounts Payable 1,000,000 Short-term debt 388,320 Unearned Revenue 0 Accrued Expenses 0 Long Term Liabilities Long-term debt 1,200,000 Unearned Revenue 110,000 Equity Common Stock 0 Additional paid in capital 0 Retained Earnings 0 Total misstatement $7,570,800 ------------------------------------------------------------------------ **Bibliography**