(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
Answer to Problem 87APSA
The gross profit margin, operating margin, net profit margin, and accounts receivables turnover
Ratios | ||
Gross Profit Margin | ||
Operating Margin | ||
Net Profit Margin | ||
Accounts Receivables Turnover |
Explanation of Solution
The Big Company has the following financial information:
Particulars | Amounts |
Amounts |
Net Sales | ||
Gross Profit | ||
Operating Income | ||
Net Income | ||
Net Accounts Receivables |
The net accounts receivable for the year
The computation of gross profit margin is as follows:
The computation of operating margin is as follows:
The computation of net profit margin is as follows:
The computation of accounts receivable turnover ratio is as follows:
(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
Answer to Problem 87APSA
The differences in the gross profit margin, operating margin, and net profit margin between
Explanation of Solution
The Big Company has the following financial information:
Particulars | Amounts |
Amounts |
Net Sales | ||
Cost of goods sold | ||
Gross Profit | ||
Operating Expenses | ||
Operating Income | ||
Other Income |
||
Net Income |
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
The difference in the operating margin i.e. increase in the operating profits is due to decrease in cost of goods sold by
The difference in the net profit margin i.e. increase in the net profit is due to decrease in cost of goods sold by
(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
Answer to Problem 87APSA
The differences in the gross profit margin, operating margin, and net profit margin between
Explanation of Solution
The Big Company has the following financial information:
Particulars | Amounts |
Amounts |
Net Sales | ||
Cost of goods sold | ||
Gross Profit | ||
Operating Expenses | ||
Operating Income | ||
Other Income |
||
Net Income |
This is given in the question.
Ratios | Increase or (Decrease) | ||
Gross Profit Margin | |||
Operating Margin | |||
Net Profit Margin | |||
Accounts Receivables Turnover |
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.
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Chapter 5 Solutions
Cornerstones of Financial Accounting
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