Leslie Fay Case

After reviewing the Financial Report from The Leslie Fay Companies from 1987 to 1991, I made ratios of Balance Sheet and Income Statement to start with audit planning, which could help us make comparison directly. Also, the calculation of ratios in liquidity, activity, profitability and solvency contains in my report. The purpose of analytical procedures is to detect “red flags” within the financial and non-financial information. For the financial part, firstly, I made year-to-year comparisons from 1987 to 1991; then, I did going concern analysis that to compare the data from The Laslie Fay Co. with the industry standard in 1991. What’s more, I consider the predicable relationships such as gross profit to sales. For the non-financial part, I analysis the economic environment during the period and big events took place in Leslie Fay Co. from 1987 to 1991. To end up with the analytical procedures, I make conclusions and provide my recommendations. The Analysis of Financial Information

Year-to-Year Comparison
First of all, the Account Receivables was increasing 4.7% (56.6 million) from 1987 amounted 82.9 million (27.1%) to 1990 amounted 139.5 million (31.8%). However, one thing is worth to mention that there was a substantial loss when Leslie Fay wrote off a receivable from Allied/Federated Department Stores after the large retailer filed bankruptcy in late 1989. As far as I can see, it is an unusual and inconsistence gain of Account Receivables in 1987 to 1990. More specifically, especially from 1989 to 1990, the Account Receivable increased from 117.3 million (30.3%) to 139.5 million (31.8%), which is a 1.5% (22.2 million) increase in one year after the large retailer announced bankruptcy and there was a large uncollectable amount from the large retailer. As a result, I suspect Leslie Fay was trying to overstate its Account Receivable amount in order to overstate its current assets.

Secondly, inventories was increasing from 83 million (27.2%) in 1987 to 147.9 million (33.7%) in 1990, which is a 6.5% (64.9 million) gain in 3 years. Nonetheless, as we all know the recession and economic changes affecting the women’s apparel industry during late 1980s and early 1990s. As a consequence, it is an indicator that Leslie Fay suspected to overstate its inventory in order to overstate its current asset. According to Account Receivable and Inventories two accounts, there is 10.8% increase in Leslie Fay’s current asset from 1987 (60.9%) to 1990 (71.7%). As far as I can see, Account Receivable and Inventories are the two main accounts which caused an unusual and inconsistent gain in total current asset in four years. Thirdly, there is unusual gain in PP&E account from 1990 (6.8%) to 1991 (9.9%). However, other accounts under Current Asset such as Inventories and Accounts Receivable started to decrease in 1990 and PP&E is the only account that increased 3.1% in one year. Also, I cannot find any equipment and estate purchased by Leslie Fay from 1990 to 1991. As a result, I suspect it might have fraud happened in Leslie Fay. Additionally, there is an unusual decrease in Long-term Debt account from 1990 to 1991.

More specifically, the Long-term Debt decreased less than 10% from 1987 (38.2%) to 1990 (29.6%). While, it decreased 8.3% from 1990 (29.6%) to 1991 (21.3%) in one year. As far as I can see, this is an unusual and inconsistent decrease of Long-term Debt and it indicated Leslie Fay suspect to understate its Long-term Debt in order to understate its Total Liabilities. What’s more, there is an unusual gain in Retained Earnings from 1990 to 1991. More specifically, Retained Earnings was increased 13.4% from 1987 (16.5%) to 1990 (29.1%). However, it zoomed from 29.1% in 1990 to 39.6% in 1991, which is an over 10% gain. In my opinion, it is an indicator for Leslie Lay to overstate its Retained earnings in order to overstate its Stockholders’ Equity. Also, the Income Tax was increasing consistently from 1987 (2.0%) to 1990 (2.3%), but it decreased from 2.3% in 1990 to 1.8% in 1991. As far as I can see, this is an unusual and inconsistent decrease in Income tax expense, it might be an indicator of Leslie Fay to understate its Income Tax expense in order to overstate its Net Income. Going Concern Analysis

To compare the key financial ratio of Leslie Fay Co with industry standards in 1991, we can see the overall operations and financial conditions are far exceed than industry standards and our expectations. With deeply analysis, I detect several problems in its Key Financial Ratio. For liquidity, its current ratio (2.9) and quick ratio (1.5) in 1991 are both over the industry standards which is 1.8 and .9, respectively. In other words, Leslie Fay had a strong ability to convert its asset into cash quickly. However, the unusual gains in PP&E account and decrease in Long-term Debt caused the increase in Total Assets and decrease in Total Liability. As a consequence, it suspected to enlarge the number of current ratio and quick ratio. For Solvency, the Long-term Debt to Equity is over the industry standard and Times Interests Earned is less than the industry standards, it means Leslie Fay had greater leverage than other companies and the times Leslie Fay can cover its income tax is shorter than other companies in the industry.

But, the unusual decrease in Long-term Debt in 1991 and inconsistent decrease in Income Tax expense which might be the reasons caused the Times Interest Earned and Long-Term Debt to Equity are greater than industry standards. For Activity, Inventory Turnover, Account Receivable Turnover and Total Assets Turnover are all greater than industry standards that indicated Leslie Fay’s operation activities are more frequently than other companies in the industry. However, the Inventory and Account Receivable started decreased 1991 (they are consistent increasing from 1987 to 1990), and only PP&E showed an unusual increase in 1991. What I am concerned, these might be the indicators that Leslie Fay to forge its activities.