XYZ Technologies, Inc. designs, manufactures, and markets an extensive line of PC cards. The company sells its PC cards primarily to original equipment manufacturers (OEMs) for industrial and commercial applications. The OEM market served by the company has intensive competition. Many OEM companies ran into financial difficulties in 2010. The following are part of the company’s financial statements. Look at them carefully.
1. Identify the red flags.
2. Determine what kind of financial statement fraud the company may be involved in.
XYZ Technologies, Inc.
Consolidated Balance Sheet (partial)
Assets
Unaudited
Dec. 31, 2011 Dec. 31, 2010
Current assets
Cash and cash equivalents $6,181,520 $ 970,446
Available for sale securities 4,932,763 0
Accounts receivable, net of
allowance for doubtful
accounts of $148,300 and
$139,200 at Dec. 31, 2011
and 2010, respectively 12,592,231 3,932,170
Inventories 18,229,317 8,609,492
Other current assets 18,229,317 8,609,492
Total current assets 60,165,148 22,121,600
XYZ Technologies, Inc.
Consolidated Income Statement (partial)
Year ended December 31
Unaudited
2011 2010 2009
Sales $37,847,681 $12,445,015 $8,213,236
Cost of goods sold 15,895,741 6,832,927 4,523,186
Gross margin 21,951,940 5,612,088 3,690,050
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