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 $2,900,000. 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.) UDEN SUPPLY COMPANY Comparative Income Statements Years Ended December 20X1, 20X2, and 20X3 (Thousands) 20X1 Audited 20X2 Audited 20X3 Audited 20X4 Expected Sales 10,500 11,800 13,100 Cost of goods sold 7,250 8,150 9.070 Gross profit 3,250 3,650 4,030 Sales commissions 740 830 920 Advertising Salaries Payroll taxes Emplovee benefits 210 240 260 1,091 1,118 1,145 190 200 210 173 182 191 20X1 Audited 20X2 Audited 20X3 Audited 20X4 Expected Sales Cost of goods sold 10,500 11,800 13,100 7,250 8,150 9,070 Gross profit 3,250 3,650 4,030 Sales commissions Advertising Salaries Payroll taxes Employee benefits 740 830 920 210 240 260 1,091 1,118 1,145 190 200 210 173 182 191 Rent 66 68 70 Depreciation Supplies Utilities Legal and accounting Miscellaneous 66 68 70 32 34 36 27 29 31 40 42 44 18 20 22 Interest expense 282 300 312 Net income before taxes 315 519 719 Income taxes 71 117 162 Net income 244 402 557 c. Uden's unaudited financial statements for the current year show a 30.76 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.)

FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
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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 $2,900,000. 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.)
UDEN SUPPLY COMPANY
Comparative Income Statements
Years Ended December 20X1, 20X2, and 20X3
(Thousands)
20X1 Audited
20X2 Audited
20X3 Audited
20X4 Expected
Sales
10,500
11,800
13,100
Cost of goods sold
7,250
8,150
9,070
Gross profit
Sales commissions
Advertising
Salaries
Payroll taxes
Emplovee benefits
3,250
3,650
4,030
740
830
920
210
240
260
1,091
1,118
1.145
190
200
210
173
182
191
20X1 Audited 20X2 Audited 20X3 Audited
20X4 Expected
Sales
10,500
11,800
13,100
Cost of goods sold
7.250
8,150
9,070
Gross profit
3,250
3,650
4,030
Sales commissions
740
830
920
Advertising
210
240
260
Salaries
1,091
1,118
1,145
Payroll taxes
190
200
210
Employee benefits
173
182
191
Rent
66
68
70
Depreciation
66
68
70
Supplies
32
34
36
Utilities
27
29
31
Legal and accounting
40
42
44
Miscellaneous
18
20
22
Interest expense
282
300
312
Net income before taxes
315
519
719
Income taxes
71
117
162
Net income
244
402
557
c. Uden's unaudited financial statements for the current year show a 30.76 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.)
Expected misstatement
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 $2,900,000. 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.) UDEN SUPPLY COMPANY Comparative Income Statements Years Ended December 20X1, 20X2, and 20X3 (Thousands) 20X1 Audited 20X2 Audited 20X3 Audited 20X4 Expected Sales 10,500 11,800 13,100 Cost of goods sold 7,250 8,150 9,070 Gross profit Sales commissions Advertising Salaries Payroll taxes Emplovee benefits 3,250 3,650 4,030 740 830 920 210 240 260 1,091 1,118 1.145 190 200 210 173 182 191 20X1 Audited 20X2 Audited 20X3 Audited 20X4 Expected Sales 10,500 11,800 13,100 Cost of goods sold 7.250 8,150 9,070 Gross profit 3,250 3,650 4,030 Sales commissions 740 830 920 Advertising 210 240 260 Salaries 1,091 1,118 1,145 Payroll taxes 190 200 210 Employee benefits 173 182 191 Rent 66 68 70 Depreciation 66 68 70 Supplies 32 34 36 Utilities 27 29 31 Legal and accounting 40 42 44 Miscellaneous 18 20 22 Interest expense 282 300 312 Net income before taxes 315 519 719 Income taxes 71 117 162 Net income 244 402 557 c. Uden's unaudited financial statements for the current year show a 30.76 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.) Expected misstatement
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