Solved by verified expert :Part 3: Use the information below to perform analytical procedures on ALL of Waren’s income statement accounts. While there is some flexibility in how you can develop expectations for EACH account, you must use each of the three primary methods discussed in class (trends, ratios, and reasonableness) at least once in your analysis. Make sure to highlight any discrepancies you feel are material and warrant further investigation. Select from your analyses one account you feel deviates materially from expectations and investigate the discrepancy appropriately. For your investigation, I play the role of Ray Kramer, so you should direct your questions to me—in my office—as part of your investigation. Once you have an explanation, describe some substantive evidence you could gather to test it.Use Excel to complete your analyses. In all cases, make sure you clearly show how you develop your expectations. Also, make sure you clearly and adequately document your investigation.Additional information that might be useful includes the following:1. Waren sold 19,350 items this year (net of returns). They sold 19,610 items last year (net of returns).2. Jim Adams worked 2100 hours of regular time this year and 194 hours of overtime. Nancy Ford worked 383 hours of regular time this year and 6 hours of overtime.3. The average effective tax rate in the industry is 21%.4. The average market interest rate on CDs during the year was 5%._____________________________________________________________________________?Waren Sports SupplyIncome StatementYear ended December 31, 2012Revenue: Sales 1,610,450Less: Sales Returns & Allowances 61,225Sales Discounts Taken 16,002Net Sales 1,533,223Cost of Goods Sold 1,141,100Gross Margin 392,123Operating Expenses: Rent expense 55,800Advertising expense 26,229Office Supplies expense 5,644Depreciation expense 33,821Wages and salaries 138,400Payroll taxes 11,300Bad debt expense 3,833Other operating expense 28,174Total Operating Expenses 303,201Operating Income 88,922Other Income and Expenses 0Income Before Taxes 88,922Income Tax Expense 18,762Net Income 70,1602013 Income StatementREVENUESales $1,588,571.00Less: Sales returns and allowances 61,111.00Sales discounts taken 15,405.82Net sales 1,509,054.18COST OF GOODS SOLDBeginning inventory 101,681.00Net purchases 1,096,859.60Freight-in 24,642.69Goods available for sale 1,223,181.29Less: Ending inventory 198,296.00Cost of goods sold 1,021,703.04GROSS MARGIN 487,351.14OPERATING EXPENSESRent expense 57,600.00Advertising expense 21,905.00Office supplies expense 5,621.45Depreciation expense 35,109.50Wages and salaries 141,563.97Payroll taxes 11,568.80Bad debt expense 3373.31Other operating expense 29,287.75Total operating expenses 306,030.78Operating income 148,138.11OTHER INCOME – Miscellaneous income 825.00OTHER EXPENSE – Interest expense 197.26INCOME BEFORE TAXES 181,320.36FEDERAL INCOME TAXES 51,741.50NET INCOME 129,578.86

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