No. 2(a) (i): Formulae and comments on the gross profit margin and the operating expenses/sales revenue ratios:
Gross Profit Margin:
The formula to compute gross profit margin is;
Gross profit x 100
The gross profit margin for the year ended 31st December 2017 was 24%. This means that for every $1 of sales revenue earned the business had $0.24 to help cover the expenses for that period. This is a 4% increase when compared to the gross profit margin of 2016 and thus a strength, or a positive thing for the business.
Operating Expenses/Sales Revenue:
The formula to compute operating expenses/sales revenue is;
Operating Expenses x 100
The operating expenses/sales revenue for the year ended 31st December 2017 was 11%. This means that for every $1 of sales revenue earned the business paid $0.11 towards expenses for that period. This is a 2% increase opposed to the $0.09 they paid in 2016. This may be perceived as a negative thing as it means that the expenses of the business increased during 2017. Please note however, that there may be a number of reasons for this such as increased sales resulting in increased expenses, and therefore may not necessarily be a sign of weakness.
No. 2(a): Calculation of currents assets and current liabilities using the current ratio:
Current Assets = $12,000 x 2 = $24,000.
2. The current liabilities as at 30th June 2012 can be calculated as follows:
$60,000/Current Liabilities = 4
Current Liabilities = $60,000/4 = $15,000.
2(b): Calculation of:
i. Average Stock = Opening stock + Closing stock/2 = ($6,800 + $4,400)/2 = $5,600.
ii. Stock Turnover = Cost of Sales/Average Stock = $118,400/$5,600 = 21.15 times.
iii. Gross Profit Percentage = Gross Profit/Sales = $131,600/$250,000 = 53%.
The author holds a Bsc (Hons) Degree in Applied Accounting from Oxford Brookes University, England and enjoys a successful career as an Accounting Supervisor and a private tutor.