Why Have Gross Profits Declined? Piran Trewin is the owner of Spyhill Ski Shop. His accountant has just handed him the financial statements for the year. The income statement is shown below in con- densed form; that is, only the information needed for the case is given. Piran is upset by this statement, and suggests to his accountant that an error has been made. His accountant assures him that everything was checked and double checked because of the low net income figure. No error was found. Piran is particularly troubled by the gross profit figure. The operating expenses appear to be normal. Piran explains that all of his merchandise is marked up 100 per cent and that there have been no special sales needed to move the goods. In other words, Piran feels that the gross profit should be at its normal figure of approxi- mately 50 per cent. Because he has to be away a great deal, Piran relies heavily on his store man- ager. In past years, Jill Zaba was the manager and no problems were encountered. A year ago, Jill left for a better position. This year, the store was managed by Jonathon Yeo. This is Jonathon's first job as store manager. SPYHILL SKI SHOP INCOME STATEMENT YEAR ENDED JUNE 30.20 $110 000 100% Revenue Sales Cost of Goods Sold Opening Inventory Purchases Cost of Goods Available Less Closing Inventory Gross Profit Operating Expenses Net Income $ 36 500 67 000 $103 500 36 000 67 500 $ 42 500 29 000 $ 13 500 61% 39% 26% 12% Questions 1. Assuming that the sales figure is correct, what should the figure for cost of goods sold have been? 2. What is the most likely reason for the high figure for cost of goods sold? 3. Try to show the cost of goods sold section as it would have appeared if there had been no irregularity 4. Suggest ways in which the owner can prevent any irregularities