Arbotech Case
A. Using information in the financial statements as originally reported in Ex 6.27 – 6.29, compute the value of beneish’s manipulation index for fiscal year 5 and year 6.
M Score = -4.840 + 0.920 x DSRI + 0.528 x GMI + 0.404 x AQ + 0.892 x SGI + 0.115 x DEPI - 0.172 x SGAI - 0.327 x LVGI + 4.697 x TATA
-4.840+0.920[(3932/12445)/(1662/8213)]+0.528{[(8213 –4523)/8213]/[(12445–6,833)/12445]}+0.404({1–[(15443+1323)/18199]}/{1–[(6320+669)/7590]})+0.892(12445/8213)+0.115{[193/(193+669)]/[337/(337+1,323)]}+-0.172[(3366/$12445)/(1889/8,213)]+-0.327{[(5592+162)/18199]/[(1132+0)/7590]}+4.67{[874–(-5665)]/18199}
Year 5 probability of manipulation is 37.3%
-4.840+0.920[(12592/37848)/3932/12445]]+0.528{[(12445-6833)/12445]/[37848-23636]/37848+0.404({1–[(48191+4698)/55782]}/{1–[(15443+1323)/18199]})+ 0.892(37848/12445)+ 0.115{[337/(337+1323)]/[645/(645 + 4698)]}+-0.172[(4591/37848)/(3366/12445)]+-0.327{[(9198+367)/55782]/[(5592+162)/
18199]}+4.67{[4902–(-12918)]/55782}
Year 6 probability of manipulation is 87.9%
B. Using information from requirement a and the financial ratios in ex 6.30, indicate possible signals that Arbortech might have been manipulating its financial statements
The high growth in sales and accurals in earnings can be seen as contributing factors towards the high probability given from Beneish’s manipulation index. One can interpret that the inventory turnover is too slow for a company that is rapidly growing.
C. Describe the effect of each of the eight accounting irregularities on the balance sheet, income statement, and statement of cash flows.
1. Recording of invalid sales transactions: this overstates sales, cost of goods sold, accounts receivables, cash flow from operations, income tax expense and net income on the income statement. This understates additional paid in capital, cash flow from financing, and inventories.
2. Recording of revenue from bill and hold transactions: This overstates sales, cost of goods sold, income tax expense, net
M Score = -4.840 + 0.920 x DSRI + 0.528 x GMI + 0.404 x AQ + 0.892 x SGI + 0.115 x DEPI - 0.172 x SGAI - 0.327 x LVGI + 4.697 x TATA
-4.840+0.920[(3932/12445)/(1662/8213)]+0.528{[(8213 –4523)/8213]/[(12445–6,833)/12445]}+0.404({1–[(15443+1323)/18199]}/{1–[(6320+669)/7590]})+0.892(12445/8213)+0.115{[193/(193+669)]/[337/(337+1,323)]}+-0.172[(3366/$12445)/(1889/8,213)]+-0.327{[(5592+162)/18199]/[(1132+0)/7590]}+4.67{[874–(-5665)]/18199}
Year 5 probability of manipulation is 37.3%
-4.840+0.920[(12592/37848)/3932/12445]]+0.528{[(12445-6833)/12445]/[37848-23636]/37848+0.404({1–[(48191+4698)/55782]}/{1–[(15443+1323)/18199]})+ 0.892(37848/12445)+ 0.115{[337/(337+1323)]/[645/(645 + 4698)]}+-0.172[(4591/37848)/(3366/12445)]+-0.327{[(9198+367)/55782]/[(5592+162)/
18199]}+4.67{[4902–(-12918)]/55782}
Year 6 probability of manipulation is 87.9%
B. Using information from requirement a and the financial ratios in ex 6.30, indicate possible signals that Arbortech might have been manipulating its financial statements
The high growth in sales and accurals in earnings can be seen as contributing factors towards the high probability given from Beneish’s manipulation index. One can interpret that the inventory turnover is too slow for a company that is rapidly growing.
C. Describe the effect of each of the eight accounting irregularities on the balance sheet, income statement, and statement of cash flows.
1. Recording of invalid sales transactions: this overstates sales, cost of goods sold, accounts receivables, cash flow from operations, income tax expense and net income on the income statement. This understates additional paid in capital, cash flow from financing, and inventories.
2. Recording of revenue from bill and hold transactions: This overstates sales, cost of goods sold, income tax expense, net