Marilyn Terrill is the senior auditor for the audit of UdenSupply Company for the year ended December 31, 20X4. In planningthe audit, Marilyn is attempting to develop expectations forplanning analytical procedures based on the financial informationfor prior years and her knowledge of the business and the industry,including these:
- Based on economic conditions, she believes that the increase insales for the current year should approximate the historicaltrend.
- Based on her knowledge of industry trends, she believes thatthe gross profit percentage for 20X4 should be about 2 percent lessthan the percentage for 20X3.
- Based on her knowledge of regulations, she is aware that theeffective tax rate for the company for 20X4 has been reduced by 5percent from that in 20X3.
- Based on a review of the general ledger, she determined thataverage depreciable assets have increased by 10 percent. Purchasesof equipment occurred relatively evenly throughout the year.
- Based on her knowledge of economic conditions, she is awarethat the effective interest rate on the company’s line of creditfor 20X4 was approximately 12 percent. The average outstandingbalance of the line of credit is $3,900,000. This line of credit isthe company’s only interest-bearing debt.
- Based on her discussions with management the advertising andsales commission percentages are expected to stay the same. Basedon her knowledge of the industry, she believes that the amount ofother expenses should be consistent with the trends from prioryears.
Comparative income statement information for Uden Supply Companyis presented in the below table.
| UDEN SUPPLY COMPANY |
| Comparative Income Statements |
| Years Ended December 20X1, 20X2, and 20X3 |
| (Thousands) |
| 20X1 Audited | 20X2 Audited | 20X3 Audited | 20X4 Expected |
| Sales | 13,500 | 14,700 | 15,900 | |
| Cost of goods sold | 9,320 | 10,150 | 11,000 | |
| Gross profit | 4,180 | 4,550 | 4,900 | |
| Sales commissions | 950 | 1,030 | 1,110 | |
| Advertising | 270 | 290 | 320 | |
| Salaries | 1,141 | 1,178 | 1,215 | |
| Payroll taxes | 200 | 209 | 218 | |
| Employee benefits | 183 | 192 | 201 | |
| Rent | 76 | 78 | 80 | |
| Depreciation | 76 | 78 | 80 | |
| Supplies | 42 | 44 | 46 | |
| Utilities | 37 | 39 | 41 | |
| Legal and accounting | 50 | 52 | 54 | |
| Miscellaneous | 28 | 30 | 32 | |
| Interest expense | 402 | 420 | 432 | |
| Net income before taxes | 725 | 910 | 1,071 | |
| Income taxes | 163 | 205 | 241 | |
| Net income | 562 | 705 | 830 | |
|
Required:
b. Determine the expected amounts for20X4 for each of the income statement items. (Round grossprofit ratio and income taxes ratio to nearest four decimal places.Round other ratios to nearest two decimal places. Round all otherintermediate computations to the nearest whole value. Enter youranswers in thousands.)
c. Uden’s unaudited financialstatements for the current year show a 30.82 percent gross profitrate. Assuming that this represents a misstatement from the amountthat you developed as an expectation, calculate the estimatedeffect of this misstatement on net income before taxes for 20X4.(Enter your answers in thousands.)
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