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Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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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 $3,600,000. 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.)](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F86a8bc29-d6b4-44ef-a2a2-89c8a986e899%2F16bec2da-3c89-4117-a901-127448faaa59%2F3b2a7y_processed.png&w=3840&q=75)
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 $3,600,000. 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.)
![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
Comparative Income Statements
Years Ended December 20X1, 20X2, and 20X3
(Thousands)
20X1 Audited 20X2 Audited 20X3 Audited
12,600
8,690
3,910
880
252
1,126
197
180
73
73
39
34
47
25
366
618
139
13,500
9,330
4,170
950
270
1,160
203
186
77
77
43
38
51
29
384
702
158
14,400 $
9,970
4,430
1,010
290
1,194
209
192
81
81
47
42
55
33
396
800
180
20X4 Expected
15,300
15,300](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2F86a8bc29-d6b4-44ef-a2a2-89c8a986e899%2F16bec2da-3c89-4117-a901-127448faaa59%2F7u4758n_processed.png&w=3840&q=75)
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
Comparative Income Statements
Years Ended December 20X1, 20X2, and 20X3
(Thousands)
20X1 Audited 20X2 Audited 20X3 Audited
12,600
8,690
3,910
880
252
1,126
197
180
73
73
39
34
47
25
366
618
139
13,500
9,330
4,170
950
270
1,160
203
186
77
77
43
38
51
29
384
702
158
14,400 $
9,970
4,430
1,010
290
1,194
209
192
81
81
47
42
55
33
396
800
180
20X4 Expected
15,300
15,300
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