Knapp Case 1.8

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Eden Mims

Case 1.8 Crazy Eddie, Inc.

1) The following table provides key financial ratios for Crazy Eddie during the period 1984-1987:

                                  1987         1986         1985         1984     Current Ratio           2.41         1.4           1.56         0.93     Quick Ratio                1.4           0.6           0.77         0.15   Debt Ratio                 0.68         0.66         0.64         0.83  Debt-to-Equity          2.16         1.98         1.75         4.88    Inventory Turnover 3.23         4.38         5.14         5.88     Asset Turnover          1.2           2.07         2.08         3.75 ROA 0.04         0.1           0.09         0.1 Return on Equity       0.11         0.31         0.25         0.61 Gross Profit Margin  0.23         0.26         0.24         0.22 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 consumer electronics industry boom days had ended. Competition in the New York area was high. Inventory turnover rates had been decreasing. Extremely high A/R turnover rates are and indicator of credit and collection policies that are too restrictive 2. Accounting irregularities could have been found sooner if some audit procedures were performed. (a) Falsification of inventory count sheets: This could have been prevented if the auditors were observing random cycle counts, if the auditors randomly performed cycle...
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