Question

The following items are taken from the financial statements of Hannah Co. for the year ending December 31, 2019 Accounts Paya

1) What is the gross profit ratio? 2) Is the company profitable? 3) Do you consider the company to be in good financial shape

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Answer #1

1. Gross profit = (Sales - Cost of goods sold) / Sales *100

= (143,000 - 40,000) / 143,000 * 100 = 72%

2. The company's profitability is calculated by deducting all the expenses incurred by the company from the sales revenue for the year. ie: Net profit = Sales - cost of goods sold - salaries expense - Insurance expense - Depreciation expense

Net profit = 143,000 - 40,000 - 52,000 - 3,000 - 12,000 = 36,000

3. For a small sized company the business seems to be in a good shape, because it has been profitable since the prior years which can be seen from the retained earnings of the company. The company has generated a net profit of 36,000 which seems to be good profit for the business and it is paying dividends to the shareholders. Also the business has enough cash and profits to meet the immediate liabilities in the near future.

4. Yes, the business is incorporated. Incorporation is a legal process used to form a corporate entity or company. It means, that the resulting company formed would have its own assets and liabilities which is separate from its owners. This is evidenced from this scenario by looking at common stock. Common stock is a form of corporate equity ownership. The business has a common stock which means that the shares are owned by one or more shareholders, which means the company is incorporated.

5. Yes, the company has been in business for more than one year. The Accounts have Retained earnings as at 1/1/19, which generally means the Company has been earning profits for more than a year. These profits are accumulated in the retained earnings year on year.

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