# 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:

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.

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

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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