A424chapter8hw
8-33 a. Gross margin percentage for drug and nondrug sales is as follows:
DRUGS
NONDRUGS
2007
2006
2005
2004
40.6%
42.2%
42.1%
42.3%
32.0%
32.0%
31.9%
31.8%
The explanation given by Adams is correct in part, but appears to be overstated. The gross margin percentage for nondrugs is approximately consistent. For drugs, the percent dropped significantly in the current year, far more than industry declines. The percent had been extremely stable before 2007. In dollars, the difference is approximately $82,000 (42.2% - 40.6% x $5,126,000) which appears to be significant. Of course, the decline in Jones' prices may be greater than the industry due to exceptional competition. b. As the auditor, you cannot accept Adams' explanation if $82,000 is material. The decline in gross margin could be due to an understatement of drug inventory, a theft of drug inventory, or understated sales. Further investigation is required to determine if the decline is due to competitive factors or to a misstatement of income.
8-37
a. eBay’s decision to offer goods for sale at fixed prices in addition to goods offered through its Internet auctions may be related to any of these possible business strategies:
Match Competition. Because other retailers offer products at fixed prices through the Internet, eBay’s ability to offer products at fixed prices allows eBay to attract customers interested in purchasing goods offered by other retailers. Customers less interested in participating in online auctions may come to eBay to purchase items at fixed prices instead of visiting other retailer’s Web sites. Thus, eBay may have decided that it needed to also offer products at fixed prices to match their competition and meet consumer expectations in the marketplace.
Target New Markets. Many consumers may not be willing to participate in online auctions due to the inconvenience of refreshing their online bids during the auction period. By offering products at fixed prices to consumers through its
DRUGS
NONDRUGS
2007
2006
2005
2004
40.6%
42.2%
42.1%
42.3%
32.0%
32.0%
31.9%
31.8%
The explanation given by Adams is correct in part, but appears to be overstated. The gross margin percentage for nondrugs is approximately consistent. For drugs, the percent dropped significantly in the current year, far more than industry declines. The percent had been extremely stable before 2007. In dollars, the difference is approximately $82,000 (42.2% - 40.6% x $5,126,000) which appears to be significant. Of course, the decline in Jones' prices may be greater than the industry due to exceptional competition. b. As the auditor, you cannot accept Adams' explanation if $82,000 is material. The decline in gross margin could be due to an understatement of drug inventory, a theft of drug inventory, or understated sales. Further investigation is required to determine if the decline is due to competitive factors or to a misstatement of income.
8-37
a. eBay’s decision to offer goods for sale at fixed prices in addition to goods offered through its Internet auctions may be related to any of these possible business strategies:
Match Competition. Because other retailers offer products at fixed prices through the Internet, eBay’s ability to offer products at fixed prices allows eBay to attract customers interested in purchasing goods offered by other retailers. Customers less interested in participating in online auctions may come to eBay to purchase items at fixed prices instead of visiting other retailer’s Web sites. Thus, eBay may have decided that it needed to also offer products at fixed prices to match their competition and meet consumer expectations in the marketplace.
Target New Markets. Many consumers may not be willing to participate in online auctions due to the inconvenience of refreshing their online bids during the auction period. By offering products at fixed prices to consumers through its