Auditing And Assurance Services
17th Edition
ISBN: 9780134897431
Author: ARENS, Alvin A.
Publisher: PEARSON
expand_more
expand_more
format_list_bulleted
Videos
Question
Chapter 21, Problem 26DQP
a.
To determine
To calculate the gross margin and inventory turnover ratio.
b.
To determine
The causes leading to changes in ratios.
c.
To determine
To identify the possibility of material misstatements in calculated ratios..
d.
To determine
To identify the causes of potential misstatements.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solution
Students have asked these similar questions
After the auditors counted the inventory of Cracker Jack Manufacturing Co. and reviewed the accounting records, something appeared to be amiss. Inventory that was counted totaled $295,000.
Inventory (1/20)
$130,000
Purchases (2020)
760,000
Sales (2020)
1,020,000
Sales returns (2020)
60,000
Gross profit ratio
35% of sales
Using the gross profit method, what did the auditors estimate as the amount of inventory that should have been on hand at December 31, 2020?
In each of the situations, discuss the appropriateness of the journal entries in terms of generally accepted accounting principles.(a) Merchandise inventory that cost $310,000 is reported on the balance sheet at $345,000, the expected selling price less estimated selling costs. The following entry was made to record this increase in value.
Inventory
35,000
Sales Revenue
35,000
(b) Because the general level of prices increased during the current year, Ebersole, Inc. determined that there was a $24,000 understatement of depreciation expense on its equipment and decided to record it in its accounts. The following entry was made.
Depreciation Expense
24,000
Accumulated Depreciation —Equipment
24,000
(c) Because of a “fire sale,” equipment obviously worth $400,000 was acquired at a cost of $310,000. The following entry was made.
Equipment
400,000
Cash
310,000
Sales Revenue
90,000
(d) Ebersole, Inc.…
The accountant for Dolfin Company prepared the following income statement. The auditor has asked you to use this statement to provide additional information to Dolfin Company on the Final Questions panel.
Dolfin Company
Income Statement
For the Year Ended December 31, 2020
1
Sales
$316,840.00
2
Expenses:
3
Cost of merchandise sold
$215,451.20
4
Selling expenses
41,189.20
5
Administrative expenses
34,852.40
6
Interest expense
275.00
7
Total expenses
291,767.80
8
Net income
$25,072.20
Final Questions
The auditor has asked you to prepare additional information about Dolfin Company’s results for last year. Use the data shown on the income statement in your computations.
1. Compute the operating expenses for Dolfin Company.
2. Compute the gross profit for Dolfin Company.
3. Compute the income from operations for…
Chapter 21 Solutions
Auditing And Assurance Services
Ch. 21 - Prob. 1RQCh. 21 - Prob. 2RQCh. 21 - Prob. 3RQCh. 21 - Prob. 4RQCh. 21 - Prob. 5RQCh. 21 - Prob. 6RQCh. 21 - Prob. 7RQCh. 21 - Prob. 8RQCh. 21 - Prob. 9RQCh. 21 - Prob. 10RQ
Ch. 21 - Prob. 11RQCh. 21 - Each employee of the Gedding Manufacturing Co., a...Ch. 21 - Prob. 13.1MCQCh. 21 - Prob. 13.2MCQCh. 21 - Prob. 13.3MCQCh. 21 - Prob. 14.1MCQCh. 21 - Prob. 14.2MCQCh. 21 - Prob. 14.3MCQCh. 21 - Prob. 15.1MCQCh. 21 - Prob. 15.2MCQCh. 21 - Prob. 15.3MCQCh. 21 - Prob. 16DQPCh. 21 - Prob. 17DQPCh. 21 - Prob. 18DQPCh. 21 - Prob. 19DQPCh. 21 - Prob. 20DQPCh. 21 - Prob. 21DQPCh. 21 - Prob. 22DQPCh. 21 - Prob. 23DQPCh. 21 - Prob. 24DQPCh. 21 - Prob. 25DQPCh. 21 - Prob. 26DQPCh. 21 - Prob. 27DQPCh. 21 - Prob. 28DQPCh. 21 - Prob. 29DQPCh. 21 - Prob. 30C
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.Similar questions
- Tanke Company reported net income on the year-end financial statements of $850,200. However, errors in inventory were discovered after the reports were issued. If inventory was overstated by $21,000, how much net income did the company actually earn?arrow_forwardUse the following hypothetical data for Walgreens in Years 11 and 12 to project revenues, cost of goods sold, and inventory for Year +1. Assume that Walgreenss Year +1 revenue growth rate, gross profit margin, and inventory turnover will be identical to Year 12. Project the average inventory balance in Year +1 and use it to compute the implied ending inventory balance.arrow_forwardThe following selected information is taken from the financial statements of Arnn Company for its most recent year of operations: During the year, Arnn had net sales of 2.45 million. The cost of goods sold was 1.3 million. Required: Note: Round all answers to two decimal places. 1. Compute the current ratio. 2. Compute the quick or acid-test ratio. 3. Compute the accounts receivable turnover ratio. 4. Compute the accounts receivable turnover in days. 5. Compute the inventory turnover ratio. 6. Compute the inventory turnover in days.arrow_forward
- Farley Bains, an auditor with Nolls CPAs, is performing a review of Teal Mountain Inc.’s Inventory account. Teal Mountain Inc. did not have a good year, and top management is under pressure to boost reported income. According to its records, the inventory balance at year-end was $808,200. However, the following information was not considered when determining that amount. Ending inventory-as reported $enter a dollar amount 1. Included in the company’s count were goods with a cost of $224,170 that the company is holding on consignment. The goods belong to Nader Corporation. enter a dollar amount 2. The physical count did not include goods purchased by Teal Mountain Inc.with a cost of $38,530 that were shipped FOB shipping point on December 28 and did not arrive at Teal Mountain Inc.’s warehouse until January 3. enter a dollar amount 3. Included in the Inventory account was $18,300 of office supplies that were stored in the…arrow_forward1. Consider the following data determined from the financial statements of a major retailer: Inventory turnover = 75 days Days' sales outstanding = 30 Days' purchases outstanding = 50 Which of the following statements is correct? A.All of these statements are correct. B.On average, the company pays its suppliers 55 days before it collects cash from its customers. C.On average, the company sells the inventory 45 days before it collects cash from its customers. D.On average, the company collects cash from its customers 20 days before it pays its suppliers. E.On average, the company purchases its inventory 25 days before it sells it. 2. Which of the following would explain why Payments to suppliers and employees for the period is greater than Total operating expenses for the period? A.Significant impairments of non-current assets during the period. B.Significant levels of prepaid expenses at the end of the period. C.Significant levels of trade payables at the end of the period.…arrow_forwardFarley Bains, an auditor with Nolls CPAs, is performing a review of Ryder Company’s Inventory account. Ryder Company did not have a good year, and top management is under pressure to boost reported income. According to its records, the inventory balance at year-end was $740,000. However, the following information was not considered when determining that amount. Included in the company’s count were goods with a cost of $228,000 that the company is holding on consignment. The goods belong to Nader Corporation. The physical count did not include goods purchased by Ryder Company with a cost of $40,000 that were shipped FOB shipping point on December 28 and did not arrive at Ryder Company’s warehouse until January 3. Included in the Inventory account was $17,000 of office supplies that were stored in the warehouse and were to be used by the company’s supervisors and managers during the coming year. The company received an order on December 29 that was boxed and was sitting on the…arrow_forward
- Zaheer Abbas, an auditor with Saeed CPAs, is performing a review of K Company’s inventory account. K Company did not have a good year and top management is under pressure to boost reported income. According to its records, the inventory balance at year-end was $37,000. However, the following information was not considered when determining that amount.1. Included in the company’s count were goods with a cost of $125,000 that the company is holding on consignment. The goods belong to S Corporation. 2. The physical count did not include goods purchased by K Company with a cost of $20,000 that were shipped FOB destination on December 28 and did not arrive at K Company’s warehouse until January 3. 3. Included in the inventory account was $8,500 of office supplies that were stored in the warehouse and were to be used by the company’s supervisors and managers during the coming year. 4. The company received an order on December 29 that was boxed and was sitting on the loading dock awaiting…arrow_forwardhe following information were made available to you by Katz Corp. in line with your audit of its financial statements as of January 1 and for the period ended December 31, 2020: Sales P53,000,000 Purchases 32,000,000 Sales discount 2,000,000 Purchase discount 1,200,000 Sales returns and allowance 1,000,000 Purchase returns and allowance 800,000 Correction of merchandise inventory, beginning error, net of Income tax – credit 400,000 Merchandise Inventory, January 1 (adjusted) 3,400,000 Merchandise Inventory, December 31 3,500,000 Distribution costs 5,000,000 General and administrative expenses 4,000,000 Interest expense 2,000,000 Gain on early extinguishment of long-term debt 500,000 Foreign translation adjustment, net of income tax – credit 1,250,000 Revaluation surplus for the period, net of income tax 700,000 Unrealized loss on financial assets at fair value through other comprehensive income or losses, net of income tax 550,000 Investment income – equity method 3,000,000 Gain on…arrow_forwardApply the COGS equation used on the bottom of page 6-3 of the VLN to the following data set to answer the question: The company had $20,000 in beginning inventory and during the year purchased $200,000 worth of inventory. Ending inventory at the end of the period was $10,000, what was the cost of goods sold for the year? ____arrow_forward
- Based on its physical count of inventory in its warehouse at year-end, December 31, 2014, Madison Company planned to report inventory of $35,300. During the audit, the independent CPA developed the following additional information: a. Goods from a supplier costing $700 are in transit with UPS on December 31, 2014. The terms are FOB shipping point (explained in the “Required” section). Because these goods had not yet arrived, they were excluded from the physical inventory count. b. Madison delivered samples costing $1,740 to a customer on December 27, 2014, with the understanding that they would be returned to Madison on January 15, 2015. Because these goods were not on hand, they were excluded from the inventory count. c. On December 31, 2014, goods in transit to customers, with terms FOB shipping point, amounted to $6,000 (expected delivery date January 10, 2015). Because the goods had been shipped, they were excluded from the physical inventory count. d. On…arrow_forwardPART 1: Identify the assertions for each of the following substantive procedures: (a) Review the monthly breakdown of sales for the main inventory item, compare to previous years, to budget, and investigate any significant differences. (b) Review the total amount of sales, compare to previous year, compare to budget, and investigate any significant differences. (c) For a selected sample of sales invoices, confirm that the sales price stated matches with the authorised price list. (d) Review post year-end sales returns and agree if they relate to pre-year-end sales that the revenue has been correctly removed from the sales records. PART 2: Explain the relevance and rellability of the following two cases as 'source of evidence. (a) The managers of a company have provided their audit firm with an oral representation confirming that the bank overdraft balances included within current liabilities are complete. (b) The managers of a company have provided their audit firm a copy of their…arrow_forwardThe condensed statement of income of LUNA, Inc. for the year ended December 31, 2020 is presented below:LUNA, Inc.Statement of Income For the Year Ended December 31, 2020Sales P 1,000,000Cos of sales 600,000Gross income 400,000Operating expenses 150,000Net income P 250,000The December 31, 2020 audit of the company’s financial statements disclosed the following errors:a. December 31, 2020 inventory was understated by P31,000.b. Accrued expenses of P4,000 and prepaid expenses of P6,000 were not recognized in the company’s books.c. Sales of P5,000 were not recorded until January 2021, although the goods were shipped in December 2020 and were excluded from the December 31 physical inventory.d. Purchases of P30,000 made in December 2020, were not recorded although the goods were received and properly included in the December 31, physical inventory.e. A machine was sold for P10,000 on July 1, 2020 and the proceeds were credited to the Sales account. The machine was acquired on January 1,…arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Managerial Accounting: The Cornerstone of Busines...AccountingISBN:9781337115773Author:Maryanne M. Mowen, Don R. Hansen, Dan L. HeitgerPublisher:Cengage Learning
Financial Reporting, Financial Statement Analysis...FinanceISBN:9781285190907Author:James M. Wahlen, Stephen P. Baginski, Mark BradshawPublisher:Cengage Learning
Financial AccountingAccountingISBN:9781305088436Author:Carl Warren, Jim Reeve, Jonathan DuchacPublisher:Cengage LearningPrinciples of Accounting Volume 1AccountingISBN:9781947172685Author:OpenStaxPublisher:OpenStax College
Managerial Accounting: The Cornerstone of Busines...
Accounting
ISBN:9781337115773
Author:Maryanne M. Mowen, Don R. Hansen, Dan L. Heitger
Publisher:Cengage Learning
Financial Reporting, Financial Statement Analysis...
Finance
ISBN:9781285190907
Author:James M. Wahlen, Stephen P. Baginski, Mark Bradshaw
Publisher:Cengage Learning
Financial Accounting
Accounting
ISBN:9781305088436
Author:Carl Warren, Jim Reeve, Jonathan Duchac
Publisher:Cengage Learning
Principles of Accounting Volume 1
Accounting
ISBN:9781947172685
Author:OpenStax
Publisher:OpenStax College
Financial ratio analysis; Author: The Finance Storyteller;https://www.youtube.com/watch?v=MTq7HuvoGck;License: Standard Youtube License