Marilyn Terrill is the senior auditor for the audit of Uden Supply Company for the year ended December 31, 20X4. In planning the audit, Marilyn is attempting to develop expectations for planning analytical procedures based on the financial information for prior years and her knowledge of the business and the industry, including these: 1. Based on economic conditions, she believes that the increase in sales for the current year should approximate the historical trend in terms of actual dollar increases. 2. Based on her knowledge of industry trends, she believes that the gross profit percentage for 20X4 should be about 2 percent less than the percentage for 20X3. 3. Based on her knowledge of regulations, she is aware that the effective tax rate for the company for 20X4 has been reduced by 5 percent from that in 20X3. 4. Based on her knowledge of economic conditions, she is aware that the effective interest rate on the company's line of credit for 20X4 was approximately 12 percent. The average outstanding balance of the line of credit is $4,000,000. This line of credit is the company's only interest-bearing debt. 5. Based on her discussions with management and her knowledge of the industry, she believes that the amount of other expenses should be consistent with the trends from prior years. Comparative income statement information for Uden Supply Company is presented in the below table. Required: b. Determine the expected amounts for 20X4 for each of the income statement items. Note: Round gross profit ratio and Income taxes ratio to nearest four decimal places. Round other ratios to nearest two decimal places. Round all other Intermediate computations to the nearest whole value. Enter your answers in thousands. UDEN SUPPLY COMPANY Comparative Income Statements Years Ended December 20X1,20X2, and 20X3 (Thousands) 20X1 Audited 20X2 Audited 20X3 Audited 20X4 Expected Sales Cast of goods sold Gross profit Sales commissions Advertising 13,800 15,100 16,400 9,520 10,430 11,350 4,280 4,670 5,050 0 970 1,060 1,150 276 300 Salaries 1,146 1,184 330 1,222 Payroll taxes 201 211 221 Employee benefits 184 194 204 Rent 77 80 83 Depreciation 77 80 83 Supplies 43 46 49 Utilities 38 41 44 Legal and accounting 51 54 57 Miscellaneous 29 32 35 Interest expense 414 432 444 Net income before taxes 774 956 1,128 Income taxes 174 215 254 Net income 600 741 874 $ 0 c. Uden's unaudited financial statements for the current year show a 30.79 percent gross profit rate. Assuming that this represents a misstatement from the amount that you developed as an expectation, calculate the estimated effect of this misstatement on net income before taxes for 20X4. Note: Enter your answers in thousands. Expected misstatement

Marilyn Terrill is the senior auditor for the audit of Uden Supply Company for the year ended December 31, 20X4. In planning the audit, Marilyn is attempting to develop expectations for planning analytical procedures based on the financial information for prior years and her knowledge of the business and the industry, including these: 1. Based on economic conditions, she believes that the increase in sales for the current year should approximate the historical trend in terms of actual dollar increases. 2. Based on her knowledge of industry trends, she believes that the gross profit percentage for 20X4 should be about 2 percent less than the percentage for 20X3. 3. Based on her knowledge of regulations, she is aware that the effective tax rate for the company for 20X4 has been reduced by 5 percent from that in 20X3. 4. Based on her knowledge of economic conditions, she is aware that the effective interest rate on the company's line of credit for 20X4 was approximately 12 percent. The average outstanding balance of the line of credit is $4,000,000. This line of credit is the company's only interest-bearing debt. 5. Based on her discussions with management and her knowledge of the industry, she believes that the amount of other expenses should be consistent with the trends from prior years. Comparative income statement information for Uden Supply Company is presented in the below table. Required: b. Determine the expected amounts for 20X4 for each of the income statement items. Note: Round gross profit ratio and Income taxes ratio to nearest four decimal places. Round other ratios to nearest two decimal places. Round all other Intermediate computations to the nearest whole value. Enter your answers in thousands. UDEN SUPPLY COMPANY Comparative Income Statements Years Ended December 20X1,20X2, and 20X3 (Thousands) 20X1 Audited 20X2 Audited 20X3 Audited 20X4 Expected Sales Cast of goods sold Gross profit Sales commissions Advertising 13,800 15,100 16,400 9,520 10,430 11,350 4,280 4,670 5,050 0 970 1,060 1,150 276 300 Salaries 1,146 1,184 330 1,222 Payroll taxes 201 211 221 Employee benefits 184 194 204 Rent 77 80 83 Depreciation 77 80 83 Supplies 43 46 49 Utilities 38 41 44 Legal and accounting 51 54 57 Miscellaneous 29 32 35 Interest expense 414 432 444 Net income before taxes 774 956 1,128 Income taxes 174 215 254 Net income 600 741 874 $ 0 c. Uden's unaudited financial statements for the current year show a 30.79 percent gross profit rate. Assuming that this represents a misstatement from the amount that you developed as an expectation, calculate the estimated effect of this misstatement on net income before taxes for 20X4. Note: Enter your answers in thousands. Expected misstatement

Cornerstones of Cost Management (Cornerstones Series)

4th Edition

ISBN:9781305970663

Author:Don R. Hansen, Maryanne M. Mowen

Publisher:Don R. Hansen, Maryanne M. Mowen

Chapter3: Cost Behavior

Section: Chapter Questions

Problem 22E: Ginnian and Fitch, a regional accounting firm, performs yearly audits on a number of different...

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