Question

Question1:

The following are account balances of Gadgets Com Pty, Ltd., a company 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:

1. Prepare a classified Income Statement
2. Prepare a classified Balance Sheet
3. Incorporating the additional information below, calculate the Gross Profit Margin (GPM) and the Profit Margin (PM) ratios for GadgetsCom and provide your comment on the company’s profitability and efficiency.

Additional Information

The manager was pleased with the increased sales revenue in the current year. Last year’s ratios are GPM 55% and PM 23%. The following are ratio formula used by the company:

Ratio	Method of calculation
Gross Profit Margin	Gross Profit     x 100    =   x%                                      Sales revenue
Profit Margin	Profit After Tax     x 100    =   x%                                    Sales revenue

Answer 1

Classified Income statement

For the year ended 31st December 2020

	$(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 December 2020

	$(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 stockholders equity	$(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 in sales 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 excessive operating expenses , net profit margin falls. So, operating efficiency is not up-to the mark in comparison to the previous year.