Your comparison of the gross margin percent for Jones Drugs for the years 2008 t
ID: 2489770 • Letter: Y
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 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 client’s records as a means of investigating the controller’s 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 client’s financial statements require intensive investigation in this audit?
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
Explanation / Answer
ANSWER A: Evaluate the explanation provided by Adams.
Gross Margin Calculation for drug and Non Drug Sales over the years for Jones Drugs :-
The explanation given by Adams that that the industry gross profit percent in the retail drug industry declined steadily for 3 years is correct The fall in gross profit for the company is significant as compared to industry average.
ANSWER B:- Which specific aspects of the client’s financial statements require intensive investigation in this audit?
The fall in gross margin of company for drugs related product is significant, this may be because of a number of factors such as - wrong estimates of inventory or understatment sales or a loss of product due to theft, fire , etc. Auditor should further investigate into the financial statements to gain an understanding of the reason for such significant decline of gross margin, as a result of company's internal factors or outside competitve factors.
DRUG Sales Cost of Goods Sold Gross Margin Gross Margin % [sales - cogs] [ gross margin/sales *100] 2011 5126 3045 2081 40.60 2010 5051 2919 2132 42.21 2009 4821 2791 2030 42.11 2008 4619 2665 1954 42.30 NON DRUG Sales Cost of Goods Sold Gross Margin Gross Margin % [sales - cogs] [ gross margin/sales *100] 2011 9085 6178 2907 32.00 2010 7865 5347 2518 32.02 2009 6641 4522 2119 31.91 2008 5732 3908 1824 31.82Related Questions
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