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70 HASKINS & SELLS September Why the Increasing Loss? MODERN accounting literature has much to say in advocation of more lucid audit reports, and in disparagement of auditors whose comments are little more than a statement that, "we have counted and verified." The value of such writings may be appraised in the light of findings in a recent engagement. The engagement was the regular annual audit for the year ended December 31, 1923, of a large wholesale dealer in woolens and allied products. The comparative statements prepared disclosed continually increasing net losses year after year. For the period under consideration the loss was a formidable amount, and was more than double the loss for the preceding period. Reasons for such a condition would be of utmost value to the client and should therefore be sought out. In the first place, unfortunate non-operating transactions might have caused the trouble. Both income credits and charges, however, were normal in amount, with non-operating income on the increase and charges on the decline. The number of unprofitable foreign exchange operations had diminished. A reduction in reserves for inventory fluctuations had resulted in a credit to other income. The source of the client's difficulties lay therefore in his regular business operations. The 1923 operating loss was $48,000, or 1 3½ per cent. of the year's net sales. The 1922 figure had been only $1,400, or 3/10 of 1 per cent. of net sales for that year. Operating expenses were then scrutinized. They were found to contain a large number of relatively fixed items, such as rent and salaries, which were too heavy for the volume of business to bear. These items had remained practically stationery during 1923, in the face of a large decline in volume of business. They served, therefore, to augment considerably the operating deficit for the year. Only a part of the increased loss, however, could be accounted for in this way. The cost of sales, although having decreased in 1923, had not fallen off as rapidly as the sales, and therefore represented a greater percentage of sales than was the case in the preceding year. This fact received rather careful attention. The woolen department was chosen for study, as being the most important as well as the most representative of the business as a whole. This department had started out at January 1, with inventories of $138,000; had made purchases during the year of $98,000; and had wound up at December 31 with inventories of $107,000. The cost of sales was therefore $129,000. On the basis of the 1922 ratio of cost of sales to sales, this figure would have been only $117,000, freight, drayage, and other miscellaneous components of cost of sales having been left out of consideration. Considering the size of the inventories involved, and the large difference between the opening and closing inventories, investigation began there. Any one of several irregularities might have caused adverse results. A mechanical mistake might have been made in the computation of the inventory figures, such as in extensions, footings, etc. However, the calculations, which were made by an inventory computing company, were tested and found correct. The use of erroneous prices in taking the inventory, either at the beginning or at the end of the year, or both, or a change in the basis used, from a higher to a lower, might cause cost of sales for 1923 to show a relative increase over 1922. However, the accountants tested the prices and found no mistakes. And the inventories at both dates were taken on the same basis—cost or current market price, whichever was lower. The January 1 inventory figures might have been padded, through the inclusion of worthless goods at inflated prices or otherwise. In view of the size of the inventories this point received particular attention, but nothing came of it.
Why the increasing loss?
Inventories -- Accounting
Haskins & Sells Bulletin, Vol. 07, no. 09 (1924 September), p. 70-71
|Source||Originally published by: Haskins & Sells|
|Collection||Deloitte Digital Collection|
|Digital Publisher||University of Mississippi Libraries. Accounting Collection|
|Identifier||HS Bulletin 7-p70|