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  • Subject Name : Accounting and Finance

Gross Profit Margin and Profit Margin Ratios Calculation - Answer 1

Income Statement of GadgetsCom Pty Ltd

For the financial year ending in 2020

Items

Amount in $'000

Income

   

Sales revenue

 

 $ 5,500.00

Less: Cost of goods sold

 

 $ (2,100.00)

Gross Profit

 

 $ 3,400.00

     

Less: Expenses

   

Administration expenses

   

Office salaries expense

 $ 825.00

 

Office utilities expenses

 $ 125.00

 

Depreciation expense

 $ 100.00

 $ (1,050.00)

     

Selling and distributions

   

Sales salaries expense

 $ 425.00

 

Sales utilities expenses

 $ 35.00

 $ (460.00)

     

Total Expenses

 

 $ (1,510.00)

Earnings before int. and tax

 

 $ 1,890.00

Less: Interest cost

 

 $ (250.00)

Profit before tax

 

 $ 1,640.00

Less: Tax expenses

 

 $ (492.00)

Profit of the year

 

 $ 1,148.00

Gross Profit Margin and Profit Margin Ratios Calculation - Answer 2

Balance Sheet of GadgetsCom Pty Ltd

Items

Amount in $'000

ASSETS

   

Non-Current assets

   

Land

 $ 1,516.00

 

Buildings &Equipment

 $ 2,169.00

 

Less: Accumulated depreciation

 $ (350.00)

 $ 3,335.00

     

Current Assets

   

Cash at bank

 $ 168.00

 

Inventory

 $ 600.00

 

Accounts receivable

 $ 450.00

 $ 1,218.00

     

TOTAL ASSETS

 

 $ 4,553.00

     

LIABILITIES

   

Non-Current Liabilities

   

Bank loan

 $ 2,000.00

 $ 2,000.00

     

Current Liabilities

   

Accounts payable

 $ 900.00

 

Notes payable (due in 12 months)

 $ 250.00

 $ 1,150.00

     

TOTAL LIABILITIES

 

 $ 3,150.00

NET ASSETS

 

 $ 1,403.00

     

Owner's Equity

   

Share capital

 $ 866.00

 

Retained Earnings

 $ 537.00

 $ 1,403.00

Gross Profit Margin and Profit Margin Ratios Calculation - Answer 3

Profitability Ratios

Ratios

2019

2020

 

Given

calculated

Gross profit ratio

55.00%

61.82%

Profit Margin

23.00%

20.87%

  • Gross Profit Ratio: This profitability ratio depicts the relation between gross profit and the total net sales revenue. The ratio for the company has increased from 55% to 61.82% over the past two years and this implies that it is able to effectively control the cost of goods sold and thus realizing higher profits.
  • Profit Margin: It depicts the proportion of net profit realized by a company in comparison to the sales revenue. The ratio for the company has depicted a decreased from 23% to 20.87% over the financial years 2019-2020. This means that the operational expenses if the company ahs increased over the past two years thus reducing the net profit position. 

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