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1.
Compute the gross margin ratio (both with and without services revenue) and profit margin ratio.
1.
Explanation of Solution
Gross margin ratio: The percentage of gross profit generated by every dollar of net sales is referred to as gross profit percentage. This ratio measures the profitability of a company by quantifying the amount of income earned from sales revenue generated after cost of goods sold are paid. The higher the ratio, the more ability to cover operating expenses. It is computed by the formula:
Compute gross margin ratio and profit margin ratio of Company BS.
| Gross profit | Without service revenue | Total revenue |
| Revenues (A) | $18,693 | $44,000 |
| Less: Cost of goods sold (B) | ($14,052) | ($14,052) |
| Gross margin (C) = | $4,641 | $29,948 |
| Gross margin ratio (D) = | 24.8% | 68.1% |
Table (1)
Profit margin ratio: It is one of the profitability ratios. Profit margin ratio is used to measure the percentage of net income that is being generated per dollar of revenue or sales.
Determine the profit margin ratio of Company BS.
As per table (1) the gross margin ratio of Company BS without service revenue and with (total) service revenue is 24.8% and 68.1% respectively and the profit margin ratio of Company BS is 42.8%.
2.
Compute the
2.
Explanation of Solution
Current ratio: Current ratio is one of the
Acid test ratio: It is a ratio used to determine a company’s ability to pay back its current liabilities by liquid assets that are current assets except inventory and prepaid expenses.
Determine the current ratio and acid-test ratio of Company BS.
| Ratios | Amount | Result |
| Current ratio | ||
| Current assets (A) | $95,568 | |
| Current liabilities (B) | $875 | |
| Current ratio | 109.2:1 | |
| Acid-test ratio | ||
| Quick assets (C) | $90,924 | |
| Current liabilities (D) | $875 | |
| Acid-test ratio | 103.9:1 | |
Table (2)
The current ratio and acid-test ratio of Company BS is 109.2 and 103.9 respectively.
3.
Compute debt ratio and equity ratio.
3.
Explanation of Solution
Debt ratio: The debt ratio shows the relationship between total asset and the total liability of the company. Debt ratio reflects the financial strategy of the company. It is used to measure the percentage of company’s assets that are financed by long term debts. Debt ratio is calculated by using the formula:
Equity ratio: The equity ratio shows the relationship between total asset and the total equity of the company. Equity ratio reflects the financial strategy of the company. It is used to measure the percentage of company’s assets that are financed by owner’s funds. Equity ratio is calculated by using the formula:
Determine the current ratio and acid-test ratio of Company BS.
| Ratios | Amount | Result |
| Debt ratio | ||
| Total liabilities (A) | $875 | |
| Total assets (B) | $120,268 | |
| Debt ratio | 0.7% | |
| Equity ratio | ||
| Total equity (C) | $119,393 | |
| Total assets (D) | $120,268 | |
| Equity ratio | 99.3% | |
Table (3)
The debt ratio and equity ratio of Company BS is 0.7% and 99.3% respectively.
4.
Determine the percentage of current assets and long-term assets with respect to total assets.
4.
Explanation of Solution
Current assets: The assets which could be converted into cash within one year like
Long-term Assets: Long-term assets are the assets that have a useful life of more than a year that is acquired by a company to be used in its business activities, for generating revenue. Examples of long term assets are Plant, Property, Equipment, Land, and Buildings.
Determine the percentage of current asset and long-term assets with respect to total assets.
| Ratios | Current Assets | Long-term Assets | Total assets |
| Assets | $95,568 | $24,700 | $120,268 |
| 79.4% | 20.5% | 100% |
Table (4)
The current assets and long-term assets of Company BS are 79.4% and 20.5% of the total assets respectively.
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Chapter 17 Solutions
Principles of Financial Accounting.
- Case 1-74 Comparative Analysis: Under Armour, lnc., versus Columbia Sportswear Refer to the 10-K reports of Under Armour, Inc., and Columbia Sportswear that are available for download from the companion website at CengageBrain.com Required: Answer the following questions: What is managements assessment of each companys past performance and future prospects? Where did you find this information?arrow_forwardCase 2-67 Comparative Analysis: Under Armour, Inc., versus Columbia Sportswear Refer to the 10-K reports of Under Armour, Inc., and Columbia Sportswear that are available for download from the companion website at CengageBrain.com Required: 3. Prepare the journal entry to record the following two events for Under Armour and Columbia. For simplicity, assume the event was recorded in a single journal entry. a. What journal entry is necessary to record net sales for the year ending December 31, 2016? Assume that all sales were made on account. b. What journal entry is necessary to record cash collections from customers during the year ending December 31, 2016?arrow_forwardProblem 2-62B Comprehensive Problem Mulberry Services sells electronic data processing services to firms too Email to own their own computing equipment. Mulberry had the following amounts and amount balances as of January 1, 2019: During 2019, the following transactions occurred (the events described below are aggregations of many individual events): During 2019, Mulberry sold $690,000 of computing services, all on credit. Mulberry collected $570,000 from the credit sales in Transaction a and an additional $129,000 from the accounts receivable outstanding at the beginning of the year. Mulberry paid the interest payable of $8,000. A Wages of $379,000 were paid in cash. Repairs and maintenance of $9,000 were incurred and paid. The prepaid rent at the beginning of the year was used in 2019. In addition, $28,000 of computer rental costs were incurred and paid. There is no prepaid rent or rent payable at year-end. Mulberry purchased computer paper for $13,000 cash in late December. None of the paper was used by year-end. Advertising expense of $26,000 was incurred and paid. Income tax of $10,300 was incurred and paid in 2019. Interest of $5,000 was paid on the long-term loan. (Continued) Required: 1. Establish a ledger for the accounts listed above and enter the beginning balances. Use a chart of accounts to order the ledger accounts. 2. Analyze each transaction, Journalize as appropriate. (Note: Ignore the date because these events are aggregations of individual events.) 3. Post your journal entries to T-accounts, Add additional T-accounts when needed. 4. Use the ending balances in the T-accounts to prepare a trial balancearrow_forward
- Google and Microsoft: Current ratio Google, Inc. and Microsoft Corporation design and distribute consumer and enterprise software, including overlaps in search, business productivity, and mobile operating systems. Googles primary source of revenue is from advertising, while Microsofts is from software subscription and support fees. The following year-end data (in millions) were taken from recent balance sheets for both companies: Microsoft Google Year 2 Year 1 Year 2 Year 1 Current assets 114,246 101,466 72,886 80,685 Current liabilities 45,625 37,417 15,908 16,805 A. Compute the working capital for each company for both years. B. Which company has the larger working capital at the end of Year 2? C. Is working capital a good measure of relative liquidity in comparing the two companies? Explain. D. Compute the current ratio for both companies. (Round to one decimal place.) E. Which company has the larger relative liquidity based on the current ratio? F. Based on your analysis, comment on the short-term debt-paying ability of these two companies.arrow_forwardProblem 2-62B Comprehensive Problem Mulberry Services sells electronic data processing services to firms too Email to own their own computing equipment. Mulberry had the following amounts and amount balances as of January 1, 2019: During 2019, the following transactions occurred (the events described below are aggregations of many individual events): During 2019, Mulberry sold $690,000 of computing services, all on credit. Mulberry collected $570,000 from the credit sales in Transaction a and an additional $129,000 from the accounts receivable outstanding at the beginning of the year. Mulberry paid the interest payable of $8,000. A Wages of $379,000 were paid in cash. Repairs and maintenance of $9,000 were incurred and paid. The prepaid rent at the beginning of the year was used in 2019. In addition, $28,000 of computer rental costs were incurred and paid. There is no prepaid rent or rent payable at year-end. Mulberry purchased computer paper for $13,000 cash in late December. None of the paper was used by year-end. Advertising expense of $26,000 was incurred and paid. Income tax of $10,300 was incurred and paid in 2019. Interest of $5,000 was paid on the long-term loan. (Continued) Required: Establish a T-account for the accounts listed above and enter the beginning balances. Use a chart of accounts to order the T-accounts. Analyze each transaction; Journalize as appropriate. (Note: Ignore the date because these events are aggregations of individual events.) Post your journal entries to the T-accounts. Add additional T-accounts when needed. Use the ending balances in the T-accounts to prepare a trial balance.arrow_forwardCase 1-74 Comparative Analysis: Under Armour, lnc., versus Columbia Sportswear Refer to the 10-K reports of Under Armour, Inc., and Columbia Sportswear that are available for download from the companion website at CengageBrain.com Required: Answer the following questions: What is the fiscal year-end of Under Armour? Of Columbia? Why would you expect these to be similar?arrow_forward
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