Chapter 5, Problem 5.3EYCT

(a) (1)

To determine

Annual Report is a comprehensive financial report that shows all the business activities that takes place throughout the previous financial year. Its purpose is to provide the complete financial information of a company’s financial activities to its users in order to help them analyze and take well informed decisions.

The following are the values for Incorporation A and Incorporation W.

Profit margin measures the amount of net income earned from each dollar of sales revenue generated by a company. Thus, it shows the relationship between the net income and net sales. It is calculated by using the following formula:

$\text{Profit Margin}=\frac{\text{Net}\text{income}}{\text{Net}\text{sales}}\times 100$

To Calculate: The profit margin for the year 2014 of Incorporation A and Incorporation W.

(2)

To determine

Gross profit represents the revenue after the deduction of cost of goods sold from the net sales of a business. Its mathematical representation is as below:

$\text{Gross profit}=\text{Net sales}–\text{Cost of goods sold}$

To Calculate: The gross profit for the year 2014 of Incorporation A and Incorporation

W.

(3)

To determine

Gross profit rate is the financial ratio shows the relationship between the gross profit on sales and net sales. Gross profit is the difference between the total revenue and the cost of goods sold. It is calculated by using the following formula:

$\text{Gross profit rate}=\frac{\text{Gross profit}}{\text{Net sales}}\times 100$

To Calculate: The gross profit rate for the year 2014 of Incorporation A and Incorporation W.

(4)

To determine

Operating income is the difference between the gross profit (revenue minus cost of goods sold) and operating expenses incurred during a particular year.

To Determine: The operating income for 2014 of Incorporation A and Incorporation W.

(5)

To determine

Operating income is the difference between the gross profit (revenue minus cost of goods sold) and operating expenses incurred during a particular year.

To Compute: The percentage change in operating income from 2014 to 2013 for Incorporation A and Incorporation W.

(b)

To determine

To Conclude: The relative profitability of the two companies from the above data.