Mickelsburg Garden Equipment Analyzing Sales Gross Margin Mi

Mickelsburg Garden Equipment: Analyzing Sales Gross Margin

Mickelsburg Garden Equipment sells farm equipment and parts directly to farmers and equipment repair companies in the Dakftas. The gross margin on equipment is relatively low compared to the margin on parts, but the costs of preparing the parts for delivery is costly, but not treated as a cost of goods sold.

During discussions with management during the audit for the year ended 12/31/14 you are informed that they are extremely pleased with the current year financial results. For the past several years’ net income before tax has been approximately 6% of sales before taxes, but this year it is more than 8%. Management attributes the increase to two factors: a significant increase in sales volume without a corresponding increase in expenses and a favorable change in sales mix between sales of parts and equipment. They have determined through their own analysis that gross margins stayed about the same each month, with small variations, for both parts and equipment.

During brainstorming discussions among the audit partner and staff the partner suggests that you do some preliminary analysis before doing any detail testing to facilitate concentrating on areas with the highest risk of misstatement. She is especially concerned that the team is satisfied that the increase in net income is consistent with the explanation provided by management. You start by performing some preliminary analysis of the financial information, which is included below. Because the decrease in all other expenses as a percentage of sales seems reasonable, you decide that for now your analysis will be limited to sales and cost of sales.

(000s omitted)

                                    Year Ended December 31, 2014    Year Ended December 31, 2013

                                       Equipment Parts                       Total        Equipment Parts                       Total

Sales

4,116

1,586

5,702

3,592

1,362

4,954

Cost of sales

3,537

773

4,310

3,139

666

3,758

Gross margin

579

813

1,392

453

696

1,195

All Other Expenses

933

893

Net Income Before Taxes

459

302

Complete the following requirements using ACL:

Q 1. Do any analysis you consider appropriate to determine if the explanation by management seems reasonable. To the extent practical your answer should include any changes caused by the increase in volume and product mix and any changes from other factors. Some of the analysis may be done without the use of ACL. For all commands or other analyses that you do, state what you did and what you found, including the effect of any change or misstatement on cost of goods sold or income. Attach any supporting analysis.

Answer:

Q 2. After you complete your analysis, identify additional testing that should be performed to determine if your concerns in Question 1 are misstatements. These tests may or may not include using ACL.

Answer:

Solution

1.

from the table it was observed that the company is making profit. also we know that for the past several years’ net income before tax has been approximately 6% of sales before taxes, but this year it is more than 8%. Management attributes the increase to two factors: a significant increase in sales volume without a corresponding increase in expenses and a favorable change in sales mix between sales of parts and equipment.

Only this comparision is not sufficient to analyse the performance. we have to check the comparative behaviour of the financial figures i.e. ratios as follows:

Here we can observe that the company\'s operating ratio is decreasing this is might be due to the increase in volume and product mix because this will in turn increase the operating costs which was not discussed in previous analysis. (here we are restricted to use only sales and costs)

2. following additional tests can be performed to analyse the performance: