DCI Corp Fraud Case

Based on the vertical analysis done on the income statement, further explanation would be needed to explain the decrease in gross profit (as a percent to sales) over the three year period while overall expenses increase each year on both a percent-to-sales and total dollar amount increment. I would also be curious to understand why cost of goods sold is increasing year-over-year – are raw materials increasing, are inventory levels too high and we are writing off obsolete inventory, is part of the increase in expenses due to credit terms we have extended customers and are now writing off as bad debt? Additionally, it appears as though we continue to invest in the business as SG&A and depreciation increase each year, but overall total gross profit decreased from 2008 to 2009 and only increased $10,000 from 2007 to 2009. Are we performing proper Return on Investments for capital expenditures? Are we adding to SG&A sales staff or overhead? All of these questions would help to explain the changes in the income statements from 2007 through 2009 based on the vertical analysis. In looking at the income statements from a horizontal analysis perspective, some addition questions that arise from a year-over-year percentage change include: how did the company increase SG&A 4% from 2008 to 2009 and only increase sales 1%, what drove revenues up nearly 8% in 2008 but just over 1% in 2009, are we focusing in the growth in the right segment areas? From reviewing the balance sheet on both a horizontal and vertical analysis, the following questions would need further explanation total current assets over the three year period are decreasing and total non-current assets are increasing – are we investing too much in the business where we are not receiving the benefits of that investment, are we tying up too much capital in non-current assets, what is the reasoning behind the decrease in inventories each year, what major capital projects have been completed over the