(a)
Gross profit margin ratio:
The gross margin ratio is a type of profitability ratio which is used to measure the returns and earning after direct expenses and compute the ratio in respect to the sales of the business.
Operating margin:
The operating margin is the ratio which is used to measure the efficiency of the operations of the business. It is computed by dividing the operating income with the net sales.
Net Profit Margin Ratio:
The net margin ratio is a type of profitability ratio which is used to measure the returns and earning after all expenses i.e. net earnings and compute the ratio in respect to the sales of the business.
Accounts Receivable Turnover Ratio:
The accounts receivable turnover ratio is a ratio which helps in measuring the process of collection of receivables of a business as faster the process, better the liquidity of the business. This ratio shows the policy of the company and its effectiveness against the credit sales of the company.
To calculate:
The gross profit margin, operating margin, net profit margin, and accounts receivables turnover
Answer to Problem 87APSA
The gross profit margin, operating margin, net profit margin, and accounts receivables turnover
Ratios | ||
Gross Profit Margin | ||
Operating Margin | ||
Net Profit Margin | ||
Accounts Receivables Turnover |
Explanation of Solution
The Big Company has the following financial information:
Particulars | Amounts |
Amounts |
Net Sales | ||
Gross Profit | ||
Operating Income | ||
Net Income | ||
Net Accounts Receivables |
The net accounts receivable for the year
The computation of gross profit margin is as follows:
The computation of operating margin is as follows:
The computation of net profit margin is as follows:
The computation of accounts receivable turnover ratio is as follows:
(b)
Gross profit margin ratio:
The gross margin ratio is a type of profitability ratio which is used to measure the returns and earning after direct expenses and compute the ratio in respect to the sales of the business.
Operating margin:
The operating margin is the ratio which is used to measure the efficiency of the operations of the business. It is computed by dividing the operating income with the net sales.
Net Profit Margin Ratio:
The net margin ratio is a type of profitability ratio which is used to measure the returns and earning after all expenses i.e. net earnings and compute the ratio in respect to the sales of the business.
Accounts Receivable Turnover Ratio:
The accounts receivable turnover ratio is a ratio which helps in measuring the process of collection of receivables of a business as faster the process, better the liquidity of the business. This ratio shows the policy of the company and its effectiveness against the credit sales of the company.
The explanation for the differences in the gross profit margin, operating margin, and net profit margin between
Answer to Problem 87APSA
The differences in the gross profit margin, operating margin, and net profit margin between
Explanation of Solution
The Big Company has the following financial information:
Particulars | Amounts |
Amounts |
Net Sales | ||
Cost of goods sold | ||
Gross Profit | ||
Operating Expenses | ||
Operating Income | ||
Other Income |
||
Net Income |
This is given in the question.
The differences in the ratios as compared to the last year are due to the changes in their respective cost or expenses.
The difference in the gross profit margin i.e. increase in the profits from the previous year is due to decrease in the cost of goods sold in regard to sales by
The difference in the operating margin i.e. increase in the operating profits is due to decrease in cost of goods sold by
The difference in the net profit margin i.e. increase in the net profit is due to decrease in cost of goods sold by
(c)
Gross profit margin ratio:
The gross margin ratio is a type of profitability ratio which is used to measure the returns and earning after direct expenses and compute the ratio in respect to the sales of the business.
Operating margin:
The operating margin is the ratio which is used to measure the efficiency of the operations of the business. It is computed by dividing the operating income with the net sales.
Net Profit Margin Ratio:
The net margin ratio is a type of profitability ratio which is used to measure the returns and earning after all expenses i.e. net earnings and compute the ratio in respect to the sales of the business.
Accounts Receivable Turnover Ratio:
The accounts receivable turnover ratio is a ratio which helps in measuring the process of collection of receivables of a business as faster the process, better the liquidity of the business. This ratio shows the policy of the company and its effectiveness against the credit sales of the company.
The explanation for the differences in the gross profit margin, operating margin, and net profit margin between
Answer to Problem 87APSA
The differences in the gross profit margin, operating margin, and net profit margin between
Explanation of Solution
The Big Company has the following financial information:
Particulars | Amounts |
Amounts |
Net Sales | ||
Cost of goods sold | ||
Gross Profit | ||
Operating Expenses | ||
Operating Income | ||
Other Income |
||
Net Income |
This is given in the question.
Ratios | Increase or (Decrease) | ||
Gross Profit Margin | |||
Operating Margin | |||
Net Profit Margin | |||
Accounts Receivables Turnover |
The differences in the ratios as compared to the last year are due to the changes in their respective cost or expenses. Due to the following reasons in the profitability ratios differences, the sale quantity and revenue of the Big Company is increased as compared to the last year financials.
The gross profit margin is used to measure the returns in regard to sales after the manufacturing or trading expenses and the difference in the gross profit margin i.e. increase in the profits from the previous year is due to decrease in the cost of goods sold.
The operating margin is used to measure the operational efficiency and profitability proportioned to sales and the difference in the operating margin i.e. increase in the operating profits is due to decrease in cost of goods sold and decrease in the operating expenses.
The net profit margin is used to measure the overall profitability position of the business in regard to the sales and the difference in the net profit margin i.e. increase in the net profit is due to decrease in cost of goods sold, decrease in the operating expenses and due to increase in the operating income.
The account receivable turnover ratio is used to measure the credit policies and the collection period process from the receivables of the business and the difference gives a negative value which means the collection efficiency of the company is not good and the amount of receivables are increased.
Want to see more full solutions like this?
Chapter 5 Solutions
Cornerstones of Financial Accounting
- 1. Solve the following ratios from year 2018-2020. Show complete solutions/computations. -OPERATING MARGIN-BASIC EARNINGS POWER-PRICE EARNINGS RATIOarrow_forwardUse this data to compute the following ratios: 1.Current ratio (Dec 2020 )2.Acid-test Ratio (Dec 2020) 3.Accounts Receivable Turnover 4.Inventory Turnover 5.Return on Assets 6.Profit Margin on Sales 7.Return on Equity 8.Times Interest Earned b.Discuss the financial condition of ABC Company, Inc. based on what you learn from computing the ratios.arrow_forwardCompose a financial analysis based on your evaluation of the ratios. For EACH of the five (5) classifications of ratios. EXPLAIN IN ONE PARAGRAPH EACH. 3A. Comparison between 2020E and 2019 ratios - (d) Profitability ratios (1) What happened? Did each of the ratios increase, decrease, or not change? (2) What had caused the movement or non-movement for each ratio? and (3) Is this a good thing or a bad thing for the company? (e) Market performance ratios) (1) What happened? Did each of the ratios increase, decrease, or not change? (2) What had caused the movement or non-movement for each ratio? and (3) Is this a good thing or a bad thing for the company?arrow_forward
- Using the financial statements provided below for ABC Manufacturing Company, calculate all the ratios listed below for both 2020 and2021. Assume that all sales are credit sales. (a) Calculate the ratios forABC Manufacturing Company for2020 and 2021. (b)Put an“I/D” beside the Year 2021 ratio calculation if the ratio has Improved/Deteriorated. Putan“S”/“W” beside the Year 2021 ratio if ABC Manufacturing Company’s ratio is Stronger/Weake rthan its competitorsarrow_forwardThe condensed financial statements of Ivanhoe Company for the years 2020-2021 are presented below: (See Images) Compute the following financial ratios by placing the proper amounts for numerators and denominators. (Round per unit answers to 2 decimal places, e.g. 52.75.) (a) Current ratio at 12/31/21 $ $ (b) Acid test ratio at 12/31/21 $ $ (c) Accounts receivable turnover in 2021 $ $ (d) Inventory turnover in 2021 $ $ (e) Profit margin on sales in 2021 $ $ (f) Earnings per share in 2021 $ (g) Return on common stockholders’ equity in 2021 $ $ (h) Price earnings ratio at 12/31/21 $ $ (i) Debt to assets at 12/31/21 $ $ (j) Book value per share at 12/31/21 $arrow_forwardByers Company presents the following condensed income statement for 2019 and condensed December 31, 2019, balance sheet: Compute the following ratios for Byers ( round all computations to two decimals): ( 1) earnings per share, ( 2) gross profit margin, ( 3) operating profit margin, ( 4) net profit margin, ( 5) total asset turnover, ( 6) return on assets, (7) return on common equity, (8) receivables turnover (in days), and (9 ) interest coverage.arrow_forward
- Solve and perform the different financial ratios using the financial statements of XYZ Company for the year 2021. 1. Current Ratio 2. Quick Ratio 3. Receivables Turnover 4. Inventory Turnover 5. Debt Ratio 6. Equity Ratio 7. Times Interest Earned 8. Gross Profit Margin 9. Operating Profit Margin 10. Net Profit Marginarrow_forwardRequired: (a) You are required to calculate the following ratios:(i) Gross profit margin(ii) Operating profit margin(iii) Expenses to sales(iv) Return on Capital Employed(v) Asset turnover(vi) Non-current asset turnover(vii) Current Ratio(viii) Quick Ratio(ix) Inventory days(x) Receivables days(xi) Payable days(xii) Interest cover (b) In light of your calculations comment on the performance of the company over thelast two years.arrow_forwarda) Calculate on the following ratios for AZ Trading for 2020 and 2021: i. Debt-to-equity ratio ii. Net profit margin iii. Current ratio iv. Inventory turnover ratio b) Provide comments in terms of liquidity, profitability, efficiency and solvency based on the computed ratios in (a) above. c) List THREE (3) objectives of ratio analysis.arrow_forward
- 1. Compute the following ratios for the comparative periods (2018 and 2019). The company used 365 days in its computation for some of the ratios. Show your solution. a. Working Capital b. Current Ratio c. Acid Test Ratio d. Accounts Receivable Turnover Ratio e. Average Collection Period f. Inventory Turnover Ratio g. Average Days in Inventory h. Number of days in Operating Cycle i. Debt to Total Assets Ratio j. Debt to Equity Ratio k. Times Interest Earned Ratio l. Gross Profit Ratio m. Profit Margin Ratio n. Return on Assets o. Return on Equity p. Assets Turnover Ratioarrow_forwardInstructions Using the financial statements and additional information, compute the following ratios for the El Camino Company for 2021. Show all computations. Computations 1. Current ratio 2. Return on common stockholders' equity 3. Price-earnings ratio 4. Inventory turnover 5. Accounts receivable turnover 6. Times interest earned 7. Profit margin 8. Days in inventory 9. Payout ratio 10. Return on assetsarrow_forwardVII. Direction: Compute and interpret. The following comparative financial statements are provided by Avatar Industries. You were asked to compute the different financial ratios and provide your interpretations with regards to profitability, efficiency, liquidity and solvency of the company. Use the Answer Sheet template below to input your answer and solution. AVATAR INDUSTRIES AVATAR INDUSTRIES Comparative Statement of Financial Position For the years 2019 and 2018 Comparative Income Statement For the years 2019 and 2018 2019 2018 2019 2018 ASSETS Current Assets: Sales P200,000 P210,000 Cash & Cash Equivalent P65,000 P70,000 Sales Returns and Allowances 40,000 25,000 Accounts Receivable 40,000 35,000 Net Sales 160,000 185,000 Marketable Secuities 40,000 35,000 Cost of Goods Sold 100,000 115,625 Inventory 100,000 80,000 Gross Profit 60,000 69,375 Total Current Assets 220,000 200,000 160,000 P445,000 P380,000 245,000 Operating Expenses: Fixed Assets Selling Expenses 22,000 25,000 Total…arrow_forward
- Cornerstones of Financial AccountingAccountingISBN:9781337690881Author:Jay Rich, Jeff JonesPublisher:Cengage LearningPrinciples of Accounting Volume 1AccountingISBN:9781947172685Author:OpenStaxPublisher:OpenStax College