Chapter 5, Problem 87APSA

To determine

(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 $2018\text{ and }2019$.

Answer to Problem 87APSA

The gross profit margin, operating margin, net profit margin, and accounts receivables turnover $2018\text{ and }2019$ are as follows:

Ratios	$2018$	$2019$
Gross Profit Margin	$67.88\%$	$68.89\%$
Operating Margin	$37.04\%$	$39.98\%$
Net Profit Margin	$36.75\%$	$40.78\%$
Accounts Receivables Turnover	$10.34\%$	$10.21\%$

Explanation of Solution

The Big Company has the following financial information:

Particulars	Amounts $\left(\$\right)$ in    $2018$	Amounts $\left(\$\right)$ in    $2019$
Net Sales	$19,30,048$	$19,97,502$
Gross Profit	$13,10,201$	$13,76,039$
Operating Income	$7,14,975$	$7,98,670$
Net Income	$7,09,255$	$8,14,643$
Net Accounts Receivables	$1,92,691$	$1,98,774$

The net accounts receivable for the year $2017$ is $\$1,80,450$. This is given in the question.

The computation of gross profit margin is as follows:

$\begin{array}{c}\text{Gross Profit Margin }\left(2018\right)=\frac{\text{Gross Profit}}{\text{Net Sales}}\times 100\\ =\frac{\$13,10,201}{\$19,30,048}\times 100\\ =67.88\%\end{array}$

$\begin{array}{c}\text{Gross Profit Margin }\left(2019\right)=\frac{\text{Gross Profit}}{\text{Net Sales}}\times 100\\ =\frac{\$13,76,039}{\$19,97,502}\times 100\\ =68.89\%\end{array}$

The computation of operating margin is as follows:

$\begin{array}{c}\text{Operating Margin }\left(2018\right)=\frac{\text{Operating Income}}{\text{Net Sales}}\times 100\\ =\frac{\$7,14,975}{\$19,30,048}\times 100\\ =37.04\%\end{array}$

$\begin{array}{c}\text{Operating Margin }\left(2019\right)=\frac{\text{Operating Income}}{\text{Net Sales}}\times 100\\ =\frac{\$7,98,670}{\$19,97,502}\times 100\\ =39.98\%\end{array}$

The computation of net profit margin is as follows:

$\begin{array}{c}\text{Net Profit Margin }\left(2018\right)=\frac{\text{Net Income}}{\text{Net Sales}}\times 100\\ =\frac{\$7,09,255}{\$19,30,048}\times 100\\ =36.75\%\end{array}$

$\begin{array}{c}\text{Net Profit Margin }\left(2019\right)=\frac{\text{Net Income}}{\text{Net Sales}}\times 100\\ =\frac{\$8,14,643}{\$19,97,502}\times 100\\ =40.78\%\end{array}$

The computation of accounts receivable turnover ratio is as follows:

$\begin{array}{c}\text{Accounts Receivable Turnover Ratio }\left(2018\right)=\frac{\text{Net Credit Sales}}{\text{Average Net Accounts Receivables}}\\ =\frac{\$19,30,048}{\frac{\left(\$1,80,450+\$1,92,691\right)}{2}}\\ =10.34\%\end{array}$

$\begin{array}{c}\text{Accounts Receivable Turnover Ratio }\left(2019\right)=\frac{\text{Net Credit Sales}}{\text{Average Net Accounts Receivables}}\\ =\frac{\$19,97,502}{\frac{\left(\$1,92,691+\$1,98,774\right)}{2}}\\ =10.21\%\end{array}$.

To determine

(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 $2018\text{ and }2019$.

Answer to Problem 87APSA

The differences in the gross profit margin, operating margin, and net profit margin between $2018\text{ and }2019$ is due to the decrease in the cost of goods sold and operating expenses in regard to sales as compared to the previous year and increase in the other income in regard to sales.

Explanation of Solution

The Big Company has the following financial information:

Particulars	Amounts $\left(\$\right)$ in    $2018$	Amounts $\left(\$\right)$ in    $2019$
Net Sales	$19,30,048$	$19,97,502$
Cost of goods sold	$6,19,847$	$6,21,463$
Gross Profit	$13,10,201$	$13,76,039$
Operating Expenses	$5,95,226$	$5,77,369$
Operating Income	$7,14,975$	$7,98,670$
Other Income    $\left(\text{expense}\right)$	$\left(5,720\right)$	$15,973$
Net Income	$7,09,255$	$8,14,643$

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 $1\%$ i.e. it is $32.12\%\left(\frac{6,19,847}{19,30,048}\right)$ in $2018$ and it is $31.11\%\left(\frac{6,21,463}{19,97,502}\right)$ in $2019$.

The difference in the operating margin i.e. increase in the operating profits is due to decrease in cost of goods sold by $1\%$ and decrease in the operating expenses by $1.94\%$ i.e. it is $30.84\%\left(\frac{5,95,226}{19,30,048}\right)$ in $2018$ and it is $28.90\%\left(\frac{5,77,369}{19,97,502}\right)$ in $2019$.

The difference in the net profit margin i.e. increase in the net profit is due to decrease in cost of goods sold by $1\%$, decrease in the operating expenses by $1.94\%$ and due to increase in the operating income by $1.10\%$ i.e. it is $\left(0.30\right)\%\left(\frac{\left(5,720\right)}{19,30,048}\right)$ in $2018$ and it is $0.80\%\left(\frac{15,973}{19,97,502}\right)$ in $2019$ .

To determine

(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 $2018\text{ and }2019$.

Answer to Problem 87APSA

The differences in the gross profit margin, operating margin, and net profit margin between $2018\text{ and }2019$ is due to the decrease in the cost of goods sold and operating expenses in regard to sales as compared to the previous year and increase in the other income in regard to sales.

Explanation of Solution

The Big Company has the following financial information:

Particulars	Amounts $\left(\$\right)$ in    $2018$	Amounts $\left(\$\right)$ in    $2019$
Net Sales	$19,30,048$	$19,97,502$
Cost of goods sold	$6,19,847$	$6,21,463$
Gross Profit	$13,10,201$	$13,76,039$
Operating Expenses	$5,95,226$	$5,77,369$
Operating Income	$7,14,975$	$7,98,670$
Other Income    $\left(\text{expense}\right)$	$\left(5,720\right)$	$15,973$
Net Income	$7,09,255$	$8,14,643$

This is given in the question.

Ratios	$2018$	$2019$	Increase or (Decrease)
Gross Profit Margin	$67.88\%$	$68.89\%$	$1.01\%$
Operating Margin	$37.04\%$	$39.98\%$	$4.03\%$
Net Profit Margin	$36.75\%$	$40.78\%$	$2.94\%$
Accounts Receivables Turnover	$10.34\%$	$10.21\%$	$-0.13\%$

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.