Question1: The following are a


The following are account balances of Gadgets Com Pty, Ltd., acompany selling gadgets, at the end of financial year 2020


2020 ($000)

Cash at bank




Accounts receivable




Buildings &Equipment


Accumulated depreciation


Accounts payable


Notes payable (due in 12 months)


Bank loan


Share capital


Retained earnings (Ending Balance)




Cost of goods sold


Finance costs


Sales salaries expense


Sales utilities expenses


Office salaries expense


Office utilities expenses


Depreciation expense


Income Tax




  1. Prepare a classified Income Statement
  2. Prepare a classified Balance Sheet
  3. 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:


Method of calculation

Gross Profit Margin

Gross Profit     x100    =   x%

                                    Sales revenue

Profit Margin

Profit After Tax     x100    =   x%

                                  Sales revenue


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

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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