Chapter 17, Problem P17.25APGA

To determine

Common-Size Income Statement: Income statement is a part of financial statements that reports the income and expenses of the business in an accounting period. When those income and expenses are not listed with actual amount but only as the percentage of total revenue than it is called common size income statement.

Common-size balance sheet: It is a part of financial statements that lists company’s assets, liabilities and shareholders’ fund. When the assets, liabilities and shareholders’ fund are not listed with actual amount but only as the percentage of total assets than it is called common size balance sheet.

Gross Profit Percentage: This ratio evaluates the profitability of each dollar of sale. Gross profit is first step toward the profitability so companies are very keen to have a higher gross profit percentage. It enables them to cover the operating expenses related to business.

Profit Margin Ratio: Profit margin ratio reflects the portion of net income in the net sales. It is a profitability measure tool that is used to evaluate the net income a business earns on every dollar of net sales. It is computed as net income divided by net revenue.

Current Ratio: A part of liquidity ratios, current ratio reflects the ability to oblige the short-term debts of a company. It is calculated based on the current assets and current liabilities; a company has in an accounting period. Current ratio is useful tool for analysis of financials of a company.

Debt to Equity Ratio: This ratio reflects the relationship of company’s total liabilities to total equity. It is used to represent financial leverage in the business. Higher ratio means that the company has used debts more than the owner’s capital to acquire the assets.

1.

To prepare: The common size income statement and balance sheet of Company K.

To determine

(a).

To Compute: The gross profit percentage of company K for the year ended December 31, 2018.

To determine

(b).

To compute: The profit margin ratio of company K for the year ended December 31, 2018.

To determine

3.

(a)

To compute: The current ratio of Company K for the year ended December 31, 2018.

To determine

(b).

To compute: The debt to equity ratio of company K for the year ended December 31, 2018.