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 ($)
600,000
Year 2 ($)
700,000
Cost of goods sold
Year 1 ($)
200,000
Year 2 ($)
200,000
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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
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Answer
Gross Profit = Sales - Cost of Goods Sold. For Year 1, Gross Profit = 600,000 - 200,000 = 400,000.
Step 2
Calculate Net Profit for Year 1
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Net Profit = Gross Profit - Expenses. For Year 1, Net Profit = 400,000 - 250,000 = 150,000.
Step 3
Calculate Gross Profit for Year 2
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For Year 2, Gross Profit = Sales - Cost of Goods Sold. Gross Profit = 700,000 - 200,000 = 500,000.
Step 4
Calculate Net Profit for Year 2
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Net Profit for Year 2 = Gross Profit - Expenses. Net Profit = 500,000 - 200,000 = 300,000.
Step 5
Calculate Return on Owner's Equity for Year 1
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Answer
Return on Owner's Equity (ROE) = Net Profit ÷ Owner's Equity. ROE Year 1 = 150,000 ÷ 500,000 = 0.30 or 30%.
Step 6
Calculate Return on Owner's Equity for Year 2
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For Year 2, ROE = 300,000 ÷ 500,000 = 0.60 or 60%.
Step 7
Calculate the Gross Profit Ratio for Year 2
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Answer
Gross Profit Ratio = Gross Profit ÷ Sales. For Year 2, Gross Profit Ratio = 500,000 ÷ 700,000 ≈ 0.714 or 71.4%.
Step 8
Determine Changes in ROE and Gross Profit Ratio
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Answer
In Year 2, ROE improved from 30% to 60%. The Gross Profit Ratio decreased from 78% (industry average) to 71.4%. Therefore, the changes are:
Return on owner's equity has improved.
Gross profit ratio is worse than the industry average.
Step 9
Select the Correct Answer
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Answer
The correct answer is A: Return on owner's equity has improved and the gross profit ratio is worse than the industry average.
