A business provides the following financial information - HSC - SSCE Business Studies - Question 20 - 2022 - Paper 1
Question 20
A business provides the following financial information.
Sales
Year 1 ($) Year 2 ($)
600,000 700,000
Cost of goods sold
200,000 200,000
Gross profit ?
Ex... show full transcript
Worked Solution & Example Answer:A business provides the following financial information - HSC - SSCE Business Studies - Question 20 - 2022 - Paper 1
Step 1
Calculate Gross Profit for Year 1 and Year 2
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Answer
For Year 1:
Gross Profit = Sales - Cost of Goods Sold = 600,000 - 200,000 = $400,000
For Year 2:
Gross Profit = Sales - Cost of Goods Sold = 700,000 - 200,000 = $500,000
Step 2
Calculate Net Profit for Year 1 and Year 2
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Calculate Return on Owner's Equity for Year 1 and Year 2
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Answer
For Year 1:
Return on Owner's Equity = Net Profit ÷ Owner's Equity = 150,000 ÷ 500,000 = 0.3 or 30%
For Year 2:
Return on Owner's Equity = Net Profit ÷ Owner's Equity = 300,000 ÷ 500,000 = 0.6 or 60%
Step 4
Calculate Gross Profit Ratio for Year 1 and Year 2
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Answer
For Year 1:
Gross Profit Ratio = Gross Profit ÷ Sales = 400,000 ÷ 600,000 = 0.6667 or 66.67%
For Year 2:
Gross Profit Ratio = Gross Profit ÷ Sales = 500,000 ÷ 700,000 = 0.7143 or 71.43%
Step 5
Evaluate the Changes
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Answer
In Year 2, the return on owner's equity has improved from 30% to 60%. The gross profit ratio in Year 2 (71.43%) is lower than the industry average (78%).
Therefore, the correct answer is: A. Return on owner’s equity has improved and the gross profit ratio is worse than the industry average.
