Janet purchased three vans, cleaning equipment, office furniture and of-fice equipment for $200,000. She made subsequent purchases of equipment as reflected in the changes in the balance sheet accounts. A local bank loaned her $120,000 at 6% for 6 years and Janet used her personal savings to pay the remaining $80,000. Since she is the sole owner of the small business, she has been operating it as a sole proprietorship and has not issued any stock. She draws money out as needed rather than taking a salary. Janet lived off her savings and withdrew nothing for herself in the first year, using all her profits to grow the business. In Years 2 and 3, she withdrew about $5,000 a month. In Year 4 she only withdrew about $2,000 a month as things started looking bad. As the business seemed to recover in Year 5, she withdrew about $4,000 a month. Janet’s main duties are to sell janitorial services to office buildings as well as oversee the completion of the office cleaning jobs. She has a full-time adminis-trative assistant who handles all of the accounting functions. Janet started her administrative assistant at a salary of $35,000 per year and has given her a small raise (2%) every year. Additionally, there are four full-time janitorial staff that help clean the office buildings. All four of these employees have been working for Janet since day one. Each janitorial employee is paid $15 per hour and all employees are paid every two weeks. Additionally, if the company has a good year, she rewards the employees and administrative assistant by letting them split a bonus of 1% of the net income amount. The bonuses are paid in the fol-lowing year when the compiled annual financial statements are made available and the bonus amounts can be calculated. She supplements the janitorial staff with temporary workers to eliminate any overtime when business increases. For Years 1 and 2, Janet had external accountants prepare a compilation report. For Years 3 through 5, she had a different set of external accountants prepare the compilation reports. The books are kept on an accrual basis of ac-counting in accordance with GAAP and that Property & Equipment is capitalized at cost and depreciated using the straight-line method over the useful life of the property (Janitorial Equipment and Vans 3 years and Office Equipment and Furniture 5 years).
Go to http://www cchgroup com/Resources and download the “Janet Janitoral Spreadsheet xls” file. Review Janet’s financial statements and identify accounts that indicate potential irregularities. Consider simultaneously evaluating accounts that have relationships, for example, consider analyzing accounts receivable with sales and bad debt expense. Analyze the trends in related accounts to determine which accounts do not follow an expected pattern. Utilize analytical techniques including horizontal trend analysis, i e. dollar and percentage change in ac-counts from year-to-year. Also, conduct vertical trend analysis, i e. balance sheet accounts as a percentage of total assets and expense accounts as a percentage of sales. Review industry standard financial statements and compare Janet Janitorial Services financial ratios to industry averages (Janitorial Services – NAIC code 561720, SIC code – 7349).Three financial ratio books are: “Industry Norms & Key Business Ratios” by Dun & Bradstreet, “Almanac of Business & Industrial Financial Ratios” (“Troy Almanac”) and “RMA (Risk Management Association) Annual Statement Studies.” Your university library should carry at least one of these reference books. As you perform your analysis, be aware of the cost and benefit of your time, do not spend time investigating accounts that have minor trend deviations. Once your analysis is completed, identify accounts that suggest further investigation. by using the drop-down selections for each cell and placing a “Y” (Yes – Investigate the account) in the cell related to the questionable account for the specific year in the “Students Answers” tab. Select an “N” (No – Account appears to be OK) in the cells related to accounts that appear OK and do not require further investigation. Be prepared to explain why you would request further information for questionable accounts. When finished, enter your name or team # in cell B8 and print out the completed “Student Answers” tab in the spreadsheet or electronically submit your file – whichever is required by the instructor .