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 $3,800,000. 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. (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.)
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 $3,800,000. 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. (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.)
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text: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 $3,800,000. 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. (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.)
Transcribed Image Text:Sales
Cost of goods sold
Gross profit
Sales commissions
Advertising
Salaries
Payroll taxes
Employee benefits
Rent
Depreciation
Supplies
Utilities
Legal and accounting
Miscellaneous
Interest expense
Net income before taxes
Income taxes
Net income
UDEN SUPPLY COMPANY
Comparative Income Statements
Years Ended December 20X1, 20X2, and 20X3
Expected misstatement
(Thousands)
20X1 Audited 20X2 Audited 20X3 Audited
13,200
9,110
4,090
920
264
1,136
199
182
75
75
41
36
49
27
390
696
157
539
14,300
9,880
4,420
1,000
290
1,172
207
190
76
76
42
37
50
28
408
844
190
654
20X4 Expected
15,400
10,660
4,740
1,080
310
1,208
215
198
77
77
43
38
51
29
420
994
224
770 $
0
0
c. Uden's unaudited financial statements for the current year show a 30.78 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. (Enter your answers in thousands.)
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