Question1: The following are a
Question1:
The following are account balances of Gadgets Com Pty, Ltd., acompany selling gadgets, at the end of financial year 2020
|
Accounts |
2020 ($000) |
|
Cash at bank |
168 |
|
Inventory |
600 |
|
Accounts receivable |
450 |
|
Land |
1,516 |
|
Buildings &Equipment |
2,169 |
|
Accumulated depreciation |
350 |
|
Accounts payable |
900 |
|
Notes payable (due in 12 months) |
250 |
|
Bank loan |
2,000 |
|
Share capital |
866 |
|
Retained earnings (Ending Balance) |
537 |
|
Sales |
5,500 |
|
Cost of goods sold |
2,100 |
|
Finance costs |
250 |
|
Sales salaries expense |
425 |
|
Sales utilities expenses |
35 |
|
Office salaries expense |
825 |
|
Office utilities expenses |
125 |
|
Depreciation expense |
100 |
|
Income Tax |
492 |
Required:
- Prepare a classified Income Statement
- Prepare a classified Balance Sheet
- Incorporating the additional information below, calculate theGross Profit Margin (GPM) and the Profit Margin (PM) ratios forGadgetsCom and provide your comment on the company’s profitabilityand efficiency.
Additional Information
The manager was pleased with the increased sales revenue in thecurrent year. Last year’s ratios are GPM 55% and PM 23%. Thefollowing are ratio formula used by the company:
|
Ratio |
Method of calculation |
|
Gross Profit Margin |
Gross Profit x100 = x% Sales revenue |
|
Profit Margin |
Profit After Tax x100 = x% Sales revenue |
Answer:
Classified Income statement
For the year ended 31st December2020
| $(000) | $(000) | |
| Sales | 5,500 | |
| Less: Cost of goods sold | 2,100 | |
| Gross profit margin | 3,400 | |
| Less: Operating expenses | ||
| Sales salaries expense | 425 | |
| Sales utilities expenses | 35 | |
| Office salaries expense | 825 | |
| Office utilities expenses | 125 | |
| Depreciation expense | 100 | |
| Total operating expenses | 1,510 | |
| Operating profit margin | 1,890 | |
| Less: Non operating expenses | ||
| Finance costs | 250 | |
| Net profit before tax | 1,640 | |
| Less: Income tax | 492 | |
| Net profit margin after tax | 1,148 |
Statement of retained earnings
For the year ended 31st December2020
| $(000) | |
| Opening balance of retained earnings [537 – 1,148] | (611) |
| Add: Net profit margin | 1,148 |
| Ending balance of retained earnings | 537 |
Balance sheet
As on 31st December 2020
| Assets | $(000) | $(000) | Liabilities and stockholdersequity | $(000) | $(000) |
| Current assets | Current liabilities | ||||
| Cash at bank | 168 | Accounts payable | 900 | ||
| Inventory | 600 | Note payable (due in 12 months ) | 250 | ||
| Accounts receivable | 450 | Total current liabilities | 1,150 | ||
| Total current assets | 1,218 | Non current liabilities | |||
| Non current assets | Bank loan | 2,000 | |||
| Land | 1,516 | Shareholder’s equity | |||
| Building & Equipment | 2,169 | Share capital | 866 | ||
| Accumulated depreciation | (350) | Retained earnings | 537 | ||
| Total non current assets | 3,335 | Total shareholder’s equity | 1,403 | ||
| Total | 4,553 | Total | 4,553 |
Gross profit margin ratio = [ Gross profit margin / net sales ]X 100 % = [ $ 3,400,000 / $ 5,500,000] X 100 % = 61.82%
Profit margin ratio = [ Net profit margin after tax / net sales] X 100 %
Profit margin ratio = [ $ 1,148,000 / $ 5,500,000] X 100 % =20.87%
Comment : May be managers are really pleased with increment insales revenue , but profit margin ratio decreased by ( 23.00 -20.87) = 02.13%.
Gross profit margin ratio increased by ( 61.82 – 55) = 6.82%along with increase in sales revenue. But due to excessiveoperating expenses , net profit margin falls. So, operatingefficiency is not up-to the mark in comparison to the previousyear.
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