Question

Sarah Welch was hired 15 years by Produce-R-Us, an importer of rare and exotic fruits. Produce-R_Us was started by an immigrant family 20 years ago and has grown to a national company with sales of $10 million annually. Although the business has grown, the family-owned business strives to maintain a "family atmosphere" and stresses trust. Because of Sarah's honesty and hard work, the manager quickly promoted her, and she now signs checks for amounts under $5,000 and also has responsibilities for Accounts Payable. Now, however, the owners are suspicious of Sarah's recent lifestyle changes and have hired you to determine whether Sarah is embezzling from the company. Public records reveal the following:

	YEAR 1	YEAR 2	YEAR 3
ASSETS
Personal residence	$ 300,000.00	$ 300,000.00	$ 300,000.00
Automobiles	$ 35,000.00	$    40,000.00	$    90,000.00
Stocks and bonds	$ 40,000.00	$ 40,000.00	$    30,000.00
Boat	$                   -	$ 75,000.00	$ 95,000.00
CDs	$ 15,000.00	$ 15,000.00	$ 40,000.00
LIABILITIES
Mortgage balance	$ 190,000.00	$ 80,000.00	$                   -
Auto loan	$    10,000.00	$ 12,500.00	$                   -
INCOME
Salary	$ 147,000.00	$ 140,000.00	$ 142,000.00
Other	$ 6,000.00	$ 6,000.00	$      4,000.00
EXPENSES
Mortgage payments	$ 12,000.00	$ 12,000.00	$ 12,000.00
Auto loan payments	$ 4,000.00	$ 4,500.00	$ 4,500.00
Other living expenses	$ 30,000.00	$ 45,000.00	$ 62,000.00

Perform a net worth calculation using the data above. (Ignore interest in your calculations.) SUGGESTION: Use a spreadsheet to make your job easier.

Answer 1

First we will calculate Net worth Based on the Asset Approach which gives us the following results for the 3 years-

Calculation of Net worth Asset Approach
Particulars	Year 1	Year 2	Year 3
Personal Residence	300,000	300,000	300,000
Automobiles	35,000	40,000	90,000
Stocks and Bonds	40,000	40,000	30,000
Boats		75,000	95,000
CD	15,000	15,000	40,000
Assets Total	390,000	470,000	555,000
Mortgage Balance	190,000	80,000	-
Auto Loan	10,000	12,500	-
Liabilities Total	200,000	92,500	-
Net Worth	190,000	377,500	555,000

Now we will calculate the Income based on the Income Statement for Miss Sarah as below

Income & Expenditure Sheet
Particulars	Year 1	Year 2	Year 3
Salary	147,000	140,000	142,000
Other Income	6,000	6,000	4,000
Total Income	153,000	146,000	146,000
Expenses
Mortgage Payments	12,000	12,000	12,000
Auto Loan Payments	4,000	4,500	4,500
Other Living Expenses	30,000	45,000	62,000
Total Expense	46,000	61,500	78,500
Net Income	107,000	84,500	67,500

Now based on the Income and Net worth of Miss Sarah on 1st Year we will determine the Capital employed by her

Calculation of Beginning Capital
Particulars	Amount
Net Worth at Year 1	190,000
Less: Net Income of Year 1	(107,000)
Capital at Year 1	83,000

Based on the above details of capital we will calculate Net worth based on Capital Approach

Calculation of Net worth Based on Capital Approach
Particulars	Amount
Capital at Year 1	83,000
Add: Net Income of Year 1	107,000
Net worth at Year 1	190,000
Add: Net Income of Year 2	84,500
Net worth at Year 2	274,500
Add: Net Income of Year 3	67,500
Net worth at Year 3	342,000

Now we will compare the Net worth arrived at from both the approaches

Comparison of Net Worth from Both Approaches
Particulars	Year 1	Year 2	Year 3
Net Worth Asset Approach	190,000	377,500	555,000
Net Worth Capital Approach	190,000	274,500	342,000
Differences	-	103,000	213,000

Based on the above analysis we can observe that there are differences in both the approaches of calculating the net worth and also the fact that the Income of Miss Sarah is decreasing year on year however her net worth is increasing at a increasing rate and thus gives us an inconsistency with her earning pattern. Which can be concluded further based on data provided that Miss Sarah is embezzling from the company.