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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. 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 2003. 4. Based on a review of the general ledger, she determined that average depreciable assets have increased by 10 percent. Purchases of equipment occurred relatively evenly throughout the year. 5. 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 $2,300,000. This line of credit is the company's only interest-bearing debt. 6. Based on her discussions with management the advertising and sales commission percentages are expected to stay the same. Based on 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. UDEN SUPPLY COMPANY Comparative Income Statements Year's Ended December 20X1, 2012, and 20x3 (Thousands) 20x1 Audited 20x2 Audited 2043 Audited 2024 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 Enployee benefits 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 incone before taxes 80 150 230 Income taxes 18 33 50 Net incone 62 117 180 167 Required: b. Determine the expected amounts for 20X4 for each of the income statement items. (Round gross profit ratio and Income taxes ratlo 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.) Answer is complete but not entirely UDEN SUPPLY COMPANY Comparative Income Statements Years Ended December 20X4 (Thousands) Sales $ 10,800 Cost of goods sold 7,468 Gross profit 3,332 Sales commissions 756 Advertising 216 Salaries 1,124 Payroll taxes 207 Employee benefits 188 Rent 63 Depreciation 69 Supplies 32 Utilities 24 Legal and accounting 43 Miscellaneous 15 Interest expense 252X Net income before taxes 343 Income taxes (75) Net income Is 268 c. 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. (Enter your answers in thousands.) Answer is complete but not entirely Expected misstatement Is 16%
