According to the producer price index database maintained by the Bureau of Labor Statistics, the average cost of computer equipment fell 3.8 percent between January and December 2016. Let’s see whether these changes are reflected in the income statement of Computer Tycoon Inc. for the year ended December 31, 2016. 2016 2015 Sales Revenue $ 120,000 $ 150,000 Cost of Goods Sold 70,000 79,500 Gross Profit 50,000 70,500 Selling, General, and Administrative Expenses 38,000 41,000 Interest Expense 700 575 Income before Income Tax Expense 11,300 28,925 Income Tax Expense 2,500 7,000 Net Income $ 8,800 $ 21,925 Required: Compute the gross profit percentage for each year. Assuming that the change from 2015 to 2016 is the beginning of a sustained trend, is Computer Tycoon likely to earn more or less gross profit from each dollar of sales in 2017? Compute the net profit margin for each year. Given your calculations here and in requirement 1, explain whether Computer Tycoon did a better or worse job of controlling operating expenses in 2016 relative to 2015. Computer Tycoon reported average net fixed assets of $56,200 in 2016 and $47,100 in 2015. Compute the fixed asset turnover ratios for both years. Did the company better utilize its investment in fixed assets to generate revenues in 2016 or 2015? Computer Tycoon reported average stockholders’ equity of $56,000 in 2016 and $42,800 in 2015. The company has not issued preferred stock. Compute the return on equity ratios for both years. Did the company generate greater returns for stockholders in 2016 than in 2015?
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
According to the producer price index database maintained by the Bureau of Labor Statistics, the average cost of computer equipment fell 3.8 percent between January and December 2016. Let’s see whether these changes are reflected in the income statement of Computer Tycoon Inc. for the year ended December 31, 2016.
| 2016 | 2015 | |||||||
| Sales Revenue | $ | 120,000 | $ | 150,000 | ||||
| Cost of Goods Sold | 70,000 | 79,500 | ||||||
| Gross Profit | 50,000 | 70,500 | ||||||
| Selling, General, and Administrative Expenses | 38,000 | 41,000 | ||||||
| Interest Expense | 700 | 575 | ||||||
| Income before Income Tax Expense | 11,300 | 28,925 | ||||||
| Income Tax Expense | 2,500 | 7,000 | ||||||
| Net Income | $ | 8,800 | $ | 21,925 | ||||
Required:
- Compute the gross profit percentage for each year. Assuming that the change from 2015 to 2016 is the beginning of a sustained trend, is Computer Tycoon likely to earn more or less gross profit from each dollar of sales in 2017?
- Compute the net profit margin for each year. Given your calculations here and in requirement 1, explain whether Computer Tycoon did a better or worse job of controlling operating expenses in 2016 relative to 2015.
- Computer Tycoon reported average net fixed assets of $56,200 in 2016 and $47,100 in 2015. Compute the fixed asset turnover ratios for both years. Did the company better utilize its investment in fixed assets to generate revenues in 2016 or 2015?
- Computer Tycoon reported average
stockholders’ equity of $56,000 in 2016 and $42,800 in 2015. The company has not issuedpreferred stock . Compute the return on equity ratios for both years. Did the company generate greater returns for stockholders in 2016 than in 2015?
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