According to the producer price index database maintained by the Bureau of Labor Statistics, the average cost of computer equipment fell 3.8 percent between January and December 2018. Let's see whether these changes are reflected in the income statement of Gonzalez Industries for the year ended December 31, 2018. Sales Revenue Cost of Goods Sold Gross Profit Selling, General, and Administrative Expenses Interest Expense Income before Income Tax Expense Income Tax Expense Net Income 2018 $ 105,000 62,500 42,500 36,500 550 5,450 1,500 $ 3,950 2017 $ 127,500 73,500 54,000 38,000 500 15,500 5,500 $ 10,000 Required: 1. Compute the gross profit percentage for each year. Assuming the change from 2017 to 2018 is the beginning of a sustained trend, is Gonzalez likely to earn more or less gross profit from each dollar of sales in 2019? 2. Compute the net profit margin for each year. Did Gonzalez do a better or worse job of controlling operating expenses in 2018 relative to 2017? 3. Gonzalez reported average net fixed assets of $54,700 in 2018 and $45,600 in 2017. Compute the fixed asset turnover ratios for both years. Did the company better utilize its investment in fixed assets to generate revenues in 2018 or 2017? 4. Gonzalez reported average stockholders' equity of $54,500 in 2018 and $41,300 in 2017. The company has not issued preferred stock. Compute the return on equity ratios for both years. Did the company generate greater returns for stockholders in 2018 than in 2017?
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
![According to the producer price index database maintained by the Bureau of Labor Statistics, the average cost of computer equipment
fell 3.8 percent between January and December 2018. Let's see whether these changes are reflected in the income statement of
Gonzalez Industries for the year ended December 31, 2018.
Sales Revenue
Cost of Goods Sold
Gross Profit
Selling, General, and Administrative Expenses
Interest Expense
Income before Income Tax Expense
Income Tax Expense
Net Income
Required 1 Required 2
Required 3
2018
$ 105,000
62,500
42,500
36,500
Required:
1. Compute the gross profit percentage for each year. Assuming the change from 2017 to 2018 is the beginning of a sustained trend, is
Gonzalez likely to earn more or less gross profit from each dollar of sales in 2019?
2. Compute the net profit margin for each year. Did Gonzalez do a better or worse job of controlling operating expenses in 2018
relative to 2017?
550
5,450
1,500
$ 3,950
3. Gonzalez reported average net fixed assets of $54,700 in 2018 and $45,600 in 2017. Compute the fixed asset turnover ratios for
both years. Did the company better utilize its investment in fixed assets to generate revenues in 2018 or 2017?
4. Gonzalez reported average stockholders' equity of $54,500 in 2018 and $41,300 in 2017. The company has not issued preferred
stock. Compute the return on equity ratios for both years. Did the company generate greater returns for stockholders in 2018 than
in 2017?
4-a. 2017 Return on equity (ROE) Percentage
4-a. 2018 Return on equity (ROE) Percentage
4-b. Greater returns generated in 2018?
Complete this question by entering your answers in the tabs below.
Required 4
2017
$ 127,500
No
73,500
54,000
38,000
500
15,500
5,500
$ 10,000
Answer is not complete.
4-a. Gonzalez reported average stockholders' equity of $54,500 in 2018 and $41,300 in 2017. The company has not issued
preferred stock. Compute the return on equity ratios for both years.
Note: Round your answers to 1 decimal place.
4-b. Did the company generate greater returns for stockholders in 2018 than in 2017?
%
24.2 X %
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