Question

ANALYZING P&l DATA
The following information is available for Pinecrest Motors Inc. ($ in millions):
	2019	2018	2017	2016
Net sales	$        23.2	$        21.7	$        19.6	$        17.4
Cost of goods sold	17.1	16.8	15.2	13.5
Beginning finished goods inventory	2.3	2.1	1.9	1.5
Ending finished goods inventory	2.9	2.3	2.1	1.9
Materials purchased	10.6	8.8	7.5	7.1
1. Calculate and present  the following ratios for each year:
- Gross profit percentage
- Inventory turnover
- Cost of materials purchased to cost of finished goods produced
2. Analyze the results obtained in your ratio calculations:
- Describe the change in each ratio you observed in 2019
- Discuss at least two possible causes of each change observed
- For each possible cause, describe the risk associated with this cause
- For each possible cause, create an internal control that will mitigate the potential effect of the risk
3. Considering that you are performing planning for an internal audit that you will be starting next week, prepare an Audit Work Program with three audit steps for each of the possible causes

Answer 1

1) Gross profit percentage for year 2019 :

GPP = Total revenue - Cost of goods sold ​​​​​​

Total revenue

= ($23.2 - $17.1) / $23.2

= $6.1 / $23.2 = o. 26 = 26 %

GPP of year 2018 = ($21.7 - $16.8) / $21.7

= $4.9 / $ 21.7 = 0.23 = 23%

GPP of year 2017 = ($19.6) - $15.2 / $19.6

= $4.4 / $19.6 = 0.22 = 22%

GPP of year 2016 = ($17.4- $13.5) / $17.4

= $3.9 / $17.4 = 0.22 = 22%

Inventory turnover for year 2019 =

Inventory turnover (IT) =     cost of goods sold

Average inventory at cost

IT for year 2019 = $17.1 / [($2.3 + $2.9) / 2]

= $17.1 / $2.6 = 6.58

IT for year 2018 = $16.8 / [($2.1 + $2.3) / 2]

= $16.8 / $2.2 = 7.63

IT for year 2017 = $15.2 / [($1.9 + $2.1) / 2]

= $15.2 / $2 = 7.6

IT for year 2016.= $13.5 / [($1.5+ $1.9) / 2]

= $13.5 / $1.7 = 7.94

Ratio of cost of materials purchased to cost of finished goods produced

=   cost of material purchased   

[ Ending inventory + cost of goods sold - (Beginning finished inventory) ]

Here cost of material purchased is given. And there is no work in progress of any beginning inventory. All beginning inventory are already converted to finished goods. And ending inventory values and cost of goods sold are already given. So this can be calculated for all years.

For year 2019 =    $10.6   

​​​​​​ [$2.9 + $17.1 - $2.3]

= $10.6 / $ 17.7 = 0.60

For year 2018 =   ​​ $8.8   

​​​​​​ [$2.3 + $16.8 - $2.1]

= $8.8 / $17 = 0.52

For year 2017.=   $7.5   

[ $2.1 + $15.2 - $1.9]

= $7.5 / $15.4=. 0.49

For year 2016 =    $7.1   

[$1.9 + $13.5 - $1.5]

= $7.1 / $13.9 = 0.51

​2) After analysing the ratios found in above question it is cleat that inventory turnover has decreased in 2019 from rest of the years. This could be iraducated by implementing preventive detective internal control. The problem which lead to decrease in inventory turnover would be investigated and detected and it should be taken care that profits should be made to maximise.

May the cause for less inventory turn over would be quality of goods produced. Special care should be given on inventory when produced. Quality should be good enough to attract customers. Otherwise risk may arise to the organization as it would have to face losses more in coming future. Demand for the product will also decrease.

One more conclusion is drawn that though gross profit has increased per year but there is not much increase from the previous period. The profit needs to be boosted up. This may be because of cost of company is also going high. One more possible reason could be that company is not introducing new products with advanced techniques and so sale is not at high rate. Company should think of ways to reduce its cost to increase its profit and also to boost its sale by introducing products with good quality.

If this goes on continuing, the company may face fall in sales and hence could face loss in future. The demand will decrease in market for its products.

For this, preventive internal controls are of great use. All those factors that are leading to reduce the quality of product needed to be prevented before they create any major issue. Steps should be taken in advance to tackle such situation. Planning has to be made in advance for adverse situations. This is preventive internal control.

3) While planning for audits, let us see steps taken to increase the turnover :

I) the materials produced should be tested properly and high value items should be made diffrenciated and special care regarding their quality should be given

2) All the products needed to be counted properly while they are in inventory before being sold to have proper data and to assure that it is correct.

3) The items cost should be properly calculated before being sold. Because any wrong interpretation can lead to causing loss and misinterpretation of figures in records.

For improving the profit, following steps should be taken at the time of audit.:

1) All the figures should be properly Writen down and calculations have to be properly conducted to get the exact figures of profit or loss accumulated every year.

2) All the cost to the company has to be seen properly and it should be seen that which costs are there that could be reduced or is possible to be reduced by some fair means. That should be made to be implemented.

3) Quality comparisons have to be conducted with previous years result and see what changes could been have brought to increase the profit. Market demand should also be focussed.