Question

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Your comparison of the gross margin percent for Jamberson Drugs for the years 2013 through 2016 indicates a significant decline. This is shown by the following information: .: (Click the icon to view the information.) The following additional information is obtained from independent sources and the client's records as a means of investigating the controller's explanations: (Click the icon to view the additional information.) Requirements a. Evaluate the explanation provided by Ackers. Show calculations to support your conclusions. b. Which specific aspects of the client's financial statements require intensive investigation in this audit? Requirement a. Evaluate the explanation provided by Ackers. Show calculations to support your conclusions. First, compute the gross margin percentage for drug sales for 2016 through 2013, then, compute the gross margin percentage for nondrug sales for 2016 through 2013. (Round your answers to the nearest tenth percent, XX.X%.) Drugs i Data Table - X | More Info 2016 2015 2014 2013 $ 2016 14,075 8,966 $ 2015 12,775 8,035 Sales (thousands) CGS (thousands) Gross margin $ 2014 11,275 7,058 $ 2013 10,300 6,407 Industry Gross Profit Percent for Retailers of Drugs and Related Products $ $ $ S 3,893 5,109 36.3 4,740 37.1 4,217 37.4 Percent 37.8 33.8 Jamberson Drugs ($ in thousands) Drug Cost of Nondrug Sales Goods Sold $ 8,375 $ 3,699 7,192 3,523 6,032 3,324 5,253 3,185 Drug Sales $ 5,700 5,583 5,243 2016 2015 2014 2013 Nondrug Cost of Goods Sold $ 5,653 4,855 4,078 3,562 34.0 34.3 5,047 34.5 A discussion with Mary Ackers, 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 three 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. Ackers feels strongly that these two factors are the cause of the decline. Print Done Print Done Enter any number in the edit fields and then click Check Answer.

Answer 1

Part A

	Drugs
2016	35.1%
2015	36.9%
2014	36.6%
2013	36.9%

	NonDrugs
2016	32.5%
2015	32.5%
2014	32.4%
2013	32.2%

Gross margin = (drug sales – drug cost of goods sold)/drug

2016 = (5700-3699)/5700 = 35.1%

2015 = (5583-3523)/5583 = 36.9%

2014 = (5243-3324)/5243 = 36.6%

2013 = (5047-3185)/5047 = 36.9%

Gross margin = (nondrug sales – nondrug cost of goods sold)/drug

2016 = (8375-5653)/8375 = 32.5%

2015 = (7192-4855)/7192 = 32.5%

2014 = (6032-4078)/6032 = 32.4%

2013 = (5253-3562)/5253 = 32.2%

Ackers is in the correct part, but it does appear to be overstated. Nondrug’s gross margin percentage is approximately consistent. In case of drugs the % dropped significantly in the current year, and it is far more than industry declines. The percent had been extremely stable before 2016. There is a different of about $102600((36.9%-35.1%)*5700) which appears to be the decline in Jamberson prices which may be greater than the industry due to exceptional competition.

Part B

Auditors would not accept Ackers explanation if $102600 is material. The decline gross margin could be due to an understatement of drug inventory a theft of drug inventory. Moreover, there is a need for investigation to determine if the decline is due to competitive factors.