Question

Simon Company’s year-end balance sheets follow.

At December 31	Current Yr			1 Yr Ago			2 Yrs Ago
Assets
Cash	$	31,800		$	35,625		$	37,800
Accounts receivable, net		89,500			62,500			50,200
Merchandise inventory		112,500			82,500			54,000
Prepaid expenses		10,700			9,375			5,000
Plant assets, net		278,500			255,000			230,500
Total assets	$	523,000		$	445,000		$	377,500
Liabilities and Equity
Accounts payable	$	129,900		$	75,250		$	51,250
Long-term notes payable secured by mortgages on plant assets		98,500			101,500			83,500
Common stock, $10 par value		163,500			163,500			163,500
Retained earnings		131,100			104,750			79,250
Total liabilities and equity	$	523,000		$	445,000		$	377,500

  
The company’s income statements for the current year and 1 year ago, follow.

For Year Ended December 31	Current Yr						1 Yr Ago
Sales				$	673,500					$	532,000
Cost of goods sold	$	411,225					$	345,500
Other operating expenses		209,550						134,980
Interest expense		12,100						13,300
Income tax expense		9,525						8,845
Total costs and expenses					642,400						502,625
Net income				$	31,100					$	29,375
Earnings per share				$	1.90					$	1.80

For both the Current Year and 1 Year Ago, compute the following ratios:

(1-a) Profit margin ratio.
(1-b) Did profit margin improve or worsen in the Current Year versus 1 Year Ago?

Profit margin ratio.

	Profit Margin Ratio Choose Numerator: / Choose Denominator: = Profit Margin Ratio / = Profit margin ratio Current Year: / = % 1 Year Ago: / = %

• Required 1A
• Required 1B

Did profit margin improve or worsen in the Current Year versus 1 Year Ago?

	Profit margin

Answer 1

Solution : 1 - a ) Calculation of Profit Margin ratio for Current Year & 1 Year ago :-

Profit Margin Ratio = Net income / Total sales * 100

	Current Year	1 Year Ago
Net Sales	$ 673500	$ 532000
Net Income	$ 31100	$ 29375

Therefore,

Current Year , Profit Margin Ratio = $ 31100 / $ 673500 *100 = 4.62%

1 Year Ago ,Profit Margin Ratio = $ 29375 / $ 532000 *100 = 5.52%

1-b ) Profit Margin Ratio worsen in the current Year as compared to 1 year ago. Although sales has been increased in the current year (from $ 532000 to $ 673500) by 26.60 % but profit margin has not been increased in that proportion .This is because Total costs & Expenses has also been increased (From $ 502625 to $ 642400 ). Therefore, Profit Margin ratio Worsen in the current year ( From 5.52 % to 4.62% ) as compared to 1 Year ago.