Question
Your comparison of the gross margin percent for Jones Drugs for the years 2008 through 2011 indicates a significant decline. This is shown by the
Your comparison of the gross margin percent for Jones Drugs for the years 2008 through 2011 indicates a significant decline. This is shown by the following information:
| 2011 | 2010 | 2009 | 2008 |
---|---|---|---|---|
Sales (thousands) | $ 14,211 | $ 12,916 | $ 11,462 | $ 10,351 |
CGS (thousands) | 9,223 | 8,266 | 7,313 | 6,573 |
Gross margin | $ 4,988 | $ 4,650 | $ 4,149 | $ 3,778 |
Percent | 35.1 | 36.0 | 36.2 | 36.5 |
A discussion with Marilyn Adams, the controller, brings to light two possible explanations. She informs you that the industry gross profit percent in the retail drug industry declined fairly steadily for 3 years, which accounts for part of the decline. A second factor was the declining percent of the total volume resulting from the pharmacy part of the business. The pharmacy sales represent the most profitable portion of the business, yet the competition from discount drugstores prevents it from expanding as fast as the nondrug items such as magazines, candy, and many other items sold. Adams feels strongly that these two factors are the cause of the decline.
The following additional information is obtained from independent sources and the clients records as a means of investigating the controllers explanations:
| Jones Drugs ($ in thousands) | Industry Gross Profit Percent for Retailers of Drugs and Related Products | |||
---|---|---|---|---|---|
| Drug Sales | Nondrug Sales | Drug Cost of Goods Sold | Nondrug Cost of Goods Sold | |
2011 | $5,126 | $9,085 | $3,045 | $6,178 | 32.7 |
2010 | 5,051 | 7,865 | 2,919 | 5,347 | 32.9 |
2009 | 4,821 | 6,641 | 2,791 | 4,522 | 33.0 |
2008 | 4,619 | 5,732 | 2,665 | 3,908 | 33.2 |
Required
a. Evaluate the explanation provided by Adams. Show calculations to support your conclusions.
b. Which specific aspects of the clients financial statements require intensive investigation in this audit?
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started