Case 1.8 Crazy Eddie

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Crazy Eddie, Inc.

Question 1
Key ratios and other financial measures:

|Pro Forma Balance Sheet Ratio |1984 |1985 |1986 |1987 | |
|Account Receivable |7.12% |4.18% |1.77% |3.68% | |
|Merchandise Inventories |63.83% |40.51% |47.16% |36.99% | |
|Account Payable |54.98% |35.22% |40.74% |16.96% | |
|Accrued Expenses |16.62% |13.33% |13.49% |1.90% | |
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Question 3 The retail consumer electronics industry was undergoing rapid and dramatic changes during the 1980’s, so did Crazy Eddie’s business. A factor in the Crazy Eddie case had to do with the inventory being overvalued. A small reason for why the inventory was overvalued is due to the rapidly decreasing prices in electronics due to constant improvements in technology. Electronics are out dated very fast if not sold upon arrival, they are always being improved on, and therefore electronic stores need to have a high inventory turnover. If not, then there is a chance that the inventory can become overvalued if the auditor does not stay up on the latest in electronics. Another change was with how Crazy Eddie was able to buy in such large amounts that he was able to sell via drop-shipments, this is something that the auditors are not used to because it is not a common occurrence. The drop-shipments would affect sales, but it should not affect inventory. As seen in this case, it required special attention because same store sales were increased by the way drop-shipments were recorded as revenue.

Question 4 The term lowballing is when the auditors sell the audit services very cheap in order to get consulting deals with the client. This can jeopardize the truthfulness of the audit because the auditors may have to agree with the client on something that will affect the audit opinion in order to
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