Question

Table A: Income Statement for Costco and Macy’s

	Costco Income statement	Macy's Income statement
	2012	2012
Net sales	97,062	30,000
Membership fees	2,075
Total revenue	99,137	30,000
Cost of goods sold (COGS)	86,823	20,000
Gross Margin	12,314	10,000
Selling, general, and administrative (SG&A)	9,518	6,000
Operating Profit	2,796	4,000
Other income (expenses)	-95	40
interest Income	103	-600
Provision for income tax	-84	-900
Net profit	2,720	2,540
g=+Gross margin percent	10.5%	33.3%
SG&A percent of sales	9.8%	20.0%
operatring profit percent	2.9%	13.3%
Net profit percent	2.80%	8.5%

Table B: Balance sheet for Costco and Macy’s

	Costco	Macy's
Cash and cash equivalents	4,009	4000
short-term investments	1,604
Accounts receivable	965	400
Merchandise inventory	6,638	8000
other current assets	490	465
total current assets	13,706	12865
Property and equipment (net)	12,432	10000
Other assets	623	6000
Total assets	26,761	28865
current liabilities	12,050	8000
Long term debt	1,253	8000
other liabilities	885	3000
Total liabilities	14,188	19000
Stockholder equity	12,573	8000

1. Show how to calculate the Gross Margin for each company. Compare and discuss findings.

2. Show how to calculate the Operating Income Percentage for each company. Compare and discuss findings.

3. Show how to calculate Total Current Assets. Compare and discuss findings.

Answer 1

1. Calculation of Gross Margin of Each Company and discussion of their findings:

The term Gross Profit refers to the margin earned by an entity after reducing the direct expenses incurred by it in relation to production or purchase of goods it sold or service it provides from the sales/ revenue.

Gross Profit = Net Revenue - Cost of Goods sold

Net Revenue = Sales - Sales Return

COGS = Opening Stock + Net Purchases + Direct Expenses - Closing Stock

Gross Margin % = (Gross Profit/ Sales)*100

Gross Margin of Coscto and Macy are as follow:

Particular	Costco	Macy
Total Revenue (a)	99137	30000
COGS (b)	86823	20000
Gross Profit (c= a-b)	12314	10000
Gross Margin =(c/a)*100	12.421%	33.333%

If we look at the Gross Margin of Costco and Macy, it depicts that the margin earned by Macy is 20.92% (33.333%-12.421%) more than the Margin earned by Costco. It means that the ratio of COGS as % of sale is less in case of Macy than Costco. The sales of Costco are approximately 3.30(99137/30000) times in comparison to Macy and it may be the reason of less GP margin as there is possibility that Costco might have to offer its product at cheaper rate to increase its sale but may not be able to reduce COGS, but still GP of Macy is far better than that of Costco.

2. Calculation of Operating Income Margin of Each Company and discussion of their findings:

The term operating profit seeks to measure the profit derived by an entity from its operations. Therefore it excludes non operating revenues like interest income from investment and non operating expenses like interest on loan, loss on sale of asset etc. from its calculation.

Operating Profit = Gross Profit - Operating Expenses

Operating Profit Margin = (Operating Profit/ Sales)*100

Operating Profit Margin of Coscto and Macy are as follow:

Assumption: Here it is assumed that membership fees collected by Costco forms regular part of income of its operations, as the calculation stated in question shows that operating profit is calculated after taking Membership Fees into consideration.

Particular	Costco	Macy
Total Revenue (a)	99137	30000
Gross Margin (b)	12314	10000
Selling General & Administration Expenses (c)	9518	6000
Operating Profit (d= b-c)	2796	4000
Operating Profit Margin =(d/a)*100	2.820%	13.333%

Like GP Margin, the operating profit margin of Macy is far better than Costco. Further though in absolute terms, Gross Profit of Costo is greater than Macy, but the operating profit of Macy is greater than Costco in absolute term also. This is due to the reason that though in % terms the ratio of SG & A in relation to sale is greater in Macy's Income Statement, but in absolute term the SG& A expenses of Macy are less than Costco by $ 3518(9518-6000). Due to this reason income from operations is more in case of Macy rather than Costco, even though Sales of Costco is far higher than Macy.

3. Calculation of Total Current Assets of Each Company and discussion of their findings:

Current assets are those assets which can reasonably be converted into cash within normal operating cycle of an entity or within 12 months.

Therefore following assets form part of current assets:

Particular	Costco	Macy
Cash and Cash Equivalents	4,009	4000
Short-Term investments	1,604	0
Accounts Receivable	965	400
Merchandise Inventory	6,638	8000
Other Current Assets	490	465
Total Current Assets	13,706	12865

The Total current assets of Costco are higher by $ 841(13706-12865) from Macy. But if we look at volume of operations of both companies, it seems that the proportion of current assets are more in case of Macy Operations rather than Costco. But the other assets of Macy are $ 6000. It is not clear as to what are other assets.

Further the sole use of Total Assets of company does not provide effective results. Rather working capital should be used as a measure for evaluation.