Best writers. Best papers. Let professionals take care of your academic papers

Order a similar paper and get 15% discount on your first order with us
Use the following coupon "FIRST15"
ORDER NOW

Questions by student: The following is the problem/case scenario and then the solutions. I have a few questions concerning the answers on the solutions: 1. On cost of goods sold, where does the .6915 come from?

/in /by

Questions by student:  The following is the problem/case scenario and then the solutions.  I have a few questions concerning the answers on the solutions:

1.  On cost of goods sold, where does the .6915 come from? 

2.  On the sales commission and the advertising, the .07 and the .02 (respectively) come from dividing the cost of the service with the gross sales  and multiplying that by the expected 2004 sales as in: Advertising 202/10,100 = .02 x 10,800 = 216.  If that is correct, then why did it not occur the same way on Salaries all the way down through Interest expense?  Why not simply use the difference in increase on the past years for sales commissions and advertising as it is done on the other items listed down through Interest expense?

3.  Where did the $354 and the .22 come from on the Income taxes?

4.  On part (c), where does the .31 come from?

Problem and Case Scnario:

In a 2-3 page paper, complete the case below and submit to instructor. Review the income statement for Uden Supply Company and answer the following:

  1. Describe the purpose of analytical procedures performed in the planning stage of the audit.
  2. Uden Supply has projected its 2004 gross profit at 31% of sales despite expectation for some shrinkage in margins. On the basis ofUden’s operating performance in years 2001 – 2003 project your best guess for 2004. Project 2004 based on the incremental changes for each line item over the last three years.
  3. Uden’s unaudited financial statements for the current year show a 31 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.
  4. Indicate whether you believe that the difference calculated in part (c) is material. Explain your answer. (50-100 words).

Comparative income statement information for Uden Supply Company is presented in the accompanying table.

UDEN SUPPLY COMPANY
Comparative Income Statement
Years Ended December 20X1, 20X2, and 20X3
(Thousands)
   20X1 Audited 20X2 Audited 20X3 Audited 20X4 Expected
Sales 8,700 9,400 10,100
Cost of goods sold 6,000 6,500 7,000  
Gross profit 2,700 2,900 3,100  
         
Sales Commissions 610 660 710  
Advertising 175 190 202  
Salaries 1,061 1,082 1,103  
Payroll taxes 184 192 199  
Employee benefits 167 174 181  
Rent 60 61 62  
Depreciation 60 63 66  
Supplies 26 28 30  
Utilities 21 22 23  
Legal and accounting 34 37 40  
Miscellaneous 12 13 14  
Interest expense 210 228 240  
Net income before taxes 80 150 230  
Incomes taxes 18 33 50  
Net income 62 117 180  

Answers per Solutions:

Sales ($10,100 + $700)………………………………………………… $ 10,800

Cost of goods sold ($10,800 x .6915)………………………………… 7,468

    Gross profit ……………………………………………………………… $3,332

Sales commissions ($10,800 x. .07) ……………………………… $      756

Advertising ($10,800 x. .02) ……………………………………………….. 216

Salaries ($1,103 +$21) …………………………………………………….. 1,124

Payroll taxes ($199 + $8)……………………………………………………. 207

Employee benefits ($181 + $7 …………………………………………….. 188

Rent ($62 + $1) ………………………………………………………………….. 63

Depreciation ($66 + $3) ……………………………………………………….. 69

Supplies ($30 + $2) …………………………………………………………….. 32

Utilities ($23 + $1) ………………………………………………………………. 24

Legal and accounting (($40 + $3) ………………………………………….. 43

Miscellaneous ($14 + $1) …………………………………………………….. 15

Interest expense ($240 + $12)……………………………………………… 252

    Total expenses…………………………………………………………… $2,989

Net income before taxes  ………………………………………………… $  343

Income taxes ($354 x .22) ………………………………………………. $    75

Net income …………………………………………………………………… $  268

(c)     $10,800 x .31 = $3,348 gross profit

$3,348 – $3,332 (expected gross profit) = $16 expected misstatement

(d)     Many would consider the amount as immaterial as a $16,000 misstatement of a net income before taxes of $343,000 is less than 5% of income.  Chapter 6 discusses materiality in greater detail.  A difference such as this makes clear the difficult task of determining what is actually a material misstatement.

 
Looking for a Similar Assignment? Order now and Get 10% Discount! Use Coupon Code "Newclient"