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Financial information published in financial statements such as Profit and Loss Accounts and Balance Sheets is useful for decision making - Leaving Cert Business - Question B - 2006
Question B
Financial information published in financial statements such as Profit and Loss Accounts and Balance Sheets is useful for decision making. Consider the following fig... show full transcript
Worked Solution & Example Answer:Financial information published in financial statements such as Profit and Loss Accounts and Balance Sheets is useful for decision making - Leaving Cert Business - Question B - 2006
Step 1
For 2004 and 2005, calculate the Gross Profit Margin
Answer
To calculate the Gross Profit Margin for both years, we first need to find the Gross Profit for each year:
- Gross Profit (GP) = Sales - Expenses
- For 2004:
- GP = €400,000 - €40,000 = €360,000
- Gross Profit Margin = ( \frac{GP}{Sales} \times 100 = \frac{360,000}{400,000} \times 100 = 90% )
- For 2005:
- GP = €500,000 - €50,000 = €450,000
- Gross Profit Margin = ( \frac{450,000}{500,000} \times 100 = 90% )
Step 2
For 2004 and 2005, calculate the Net Profit Margin
Answer
To calculate the Net Profit Margin for both years:
- Net Profit Margin = ( \frac{Net Profit}{Sales} \times 100 )
- For 2004:
- Net Profit Margin = ( \frac{60,000}{400,000} \times 100 = 15% )
- For 2005:
- Net Profit Margin = ( \frac{70,000}{500,000} \times 100 = 14% )
Step 3
For 2004 and 2005, calculate the Return on Investment
Answer
To calculate the Return on Investment (ROI) for both years:
- ROI = ( \frac{Net Profit}{Capital Employed} \times 100 )
- For 2004:
- ROI = ( \frac{60,000}{600,000} \times 100 = 10% )
- For 2005:
- ROI = ( \frac{70,000}{650,000} \times 100 \approx 10.77% )
Step 4
Analyse these profitability trends and discuss how shareholders might use them in making decisions
Answer
The analysis of the profitability margins indicates a decrease in both the Net Profit Margin and the Return on Investment from 2004 to 2005, despite an increase in gross profit.
- Gross Profit Margin remained stable at 90%, suggesting efficient control over direct costs relative to sales.
- The Net Profit Margin dropped from 15% to 14%, indicating that the expenses increased at a faster rate than net profit, which could concern shareholders as it reflects decreasing profitability after expenses.
- The Return on Investment increased slightly to approximately 10.77%, which is positive and suggests that the company is generating adequate returns relative to its capital employed.
Shareholders may use this information to evaluate the company's financial health and trend over time, deciding on future investments or whether to consider changes in management strategies to optimize profitability.