Chapter 8, Problem 5C

Gross Profit

Shelly Corporation is an importer and wholesaler. Its merchandise is purchased from several suppliers and is warehoused by Shelly until sold to consumers. In conducting her audit for the year ended June 30, 2019, the corporation’s CPA determined that the system of internal control was good. Accordingly, she observed the physical inventory at an interim date, May 31, 2019, instead of at year-end.

The CPA obtained the following information from the general ledger:

The CPA’s audit disclosed the following information:

Required:

In audit engagements in which interim physical inventories are observed, a frequently used auditing procedure is to test the reasonableness of the year-end inventory by the application of gross profit ratios. Prepare in good form the following schedules:

1. 1. Computation of the gross profit ratio for 11 months ended May 31, 2019
2. 2. Computation by the gross profit ratio method of cost of goods sold during June 2019
3. 3. Computation by the gross profit ratio method of June 30, 2019 inventory