David and Roger Ltd is an expanding public company selling a variety of products (only on credit). Simplified income statements and balance sheets for the past 2 years, together with other selected information about the company, are provided below. Balance sheet of David and Roger Ltd 30 June 2017 30 June 2016 $’000 $’000 Current assets Cash 400 200 Accounts receivable 2 500 1 300 Inventory 1 150 750 Total current assets 4 050 2 250 Non-current assets Machinery (at net book value) 2 200 1 010 Land and buildings (at net book value) 3 950 3 015 Total non-current assets 6 150 4 025 Total assets 10 200 6 275 Current liabilities Bank overdraft 800 275 Accounts payable 1 700 600 Accruals 200 250 Total current liabilities 2 700 1 125 Non-current liabilities Long term loans 3 950 2 000 Total non-current liabilities 3 950 2 000 Total liabilities 6 650 3 125 Net assets 3 550 3 150 Shareholders’ equity Paid up capital (1 000 000 ordinary shares) 1 000 1 000 Retained profits 2 550 2 150 Total shareholders’ equity 3 550 3 150 Additional Information: Net cash flow from operations 1 200 950 Market price of a share in the company (30 June) $6.50 $4.00 Inventory at 30 June 2015 was $780 000 Accounts receivable at 30 June 2015 was $1 300 000 Total assets at 30 June 2015 was $5 000 000 Total shareholders’ equity at 30 June 2015 was $2 900 000 Income Statement of David and Roger Ltd for the year ending 30 June 2017 30 June 2016 $’000 $’000 Sales revenue 11 000 8 125 Less cost of sales 7 700 5 687 Gross profit 3 300 2 438 Less other operating expenses General 1 700 1 382 Interest 560 256 Total other operating expenses 2 260 1 638 Net profit before tax 1 040 800 Less income tax expense 160 150 Net profit after tax 880 650 Required: Calculate Profit margin and gross profit margin for the financial year 2017. a. None of answers given b. Profit margin: 12% Gross profit margin: 25% c. Profit margin: 10% Gross profit margin: 20% d. Profit margin: 8% Gross profit margin: 30%
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.
David and Roger Ltd is an expanding public company selling a variety of products (only on credit). Simplified income statements and balance sheets for the past 2 years, together with other selected information about the company, are provided below.
Balance sheet of David and Roger Ltd
30 June 2017 30 June 2016
$’000 $’000
Current assets
Cash 400 200
Accounts receivable 2 500 1 300
Inventory 1 150 750
Total current assets 4 050 2 250
Non-current assets
Machinery (at net book value) 2 200 1 010
Land and buildings (at net book value) 3 950 3 015
Total non-current assets 6 150 4 025
Total assets 10 200 6 275
Current liabilities
Bank overdraft 800 275
Accounts payable 1 700 600
Accruals 200 250
Total current liabilities 2 700 1 125
Non-current liabilities
Long term loans 3 950 2 000
Total non-current liabilities 3 950 2 000
Total liabilities 6 650 3 125
Net assets 3 550 3 150
Shareholders’ equity
Paid up capital (1 000 000 ordinary shares) 1 000 1 000
Retained profits 2 550 2 150
Total shareholders’ equity 3 550 3 150
Additional Information:
Net cash flow from operations 1 200 950
Market price of a share in the company (30 June) $6.50 $4.00
Inventory at 30 June 2015 was $780 000
Accounts receivable at 30 June 2015 was $1 300 000
Total assets at 30 June 2015 was $5 000 000
Total shareholders’ equity at 30 June 2015 was $2 900 000
Income Statement of David and Roger Ltd
for the year ending 30 June 2017 30 June 2016
$’000 $’000
Sales revenue 11 000 8 125
Less cost of sales 7 700 5 687
Gross profit 3 300 2 438
Less other operating expenses
General 1 700 1 382
Interest 560 256
Total other operating expenses 2 260 1 638
Net profit before tax 1 040 800
Less income tax expense 160 150
Net profit after tax 880 650
Required:Calculate
Profit margin and gross profit margin for the financial year 2017.
None of answers given
Profit margin: 12% Gross profit margin: 25%
Profit margin: 10% Gross profit margin: 20%
Profit margin: 8% Gross profit margin: 30%
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