Critical Thinking: Income Statements And Profitability Ratio

Critical Thinking: Income Statements and Profitability Ratios (60 Points)

In this module, you were introduced to the income statement and profitability ratios. In this assignment, you will use this information to create an income statement and then analyze it for profitability. Selected accounts for Jackson, Inc. are listed below along with their balances before closing the year of 12/31/12. Jackson, Inc. is a firm that manufactures wireless mouse systems for laptops. Use this information to complete the required elements below.

Interest expense: 2,000

Sales revenue: 297,000

Selling expenses: 38,200

Administrative expenses: 16,700

Cost of goods sold: 162,300

Dividends: 12,200

Gain on sale of equipment: 3,600

Loss from fire: 7,500

Retained Earnings (1/1/12 balance): 335,000

Tax expense: 22,800

The current syllabus cites a previous edition of the textbook. The attached update is correct for Winter and Spring—all current and upcoming terms.

Required: On a spreadsheet, prepare a multistep Income Statement for the year ending 12/31/12 with proper heading. Near the bottom of your income statement should have a subtotal for Income before taxes and then subtract taxes to compute Net income. Net income should have a double underline.

1. On the same spreadsheet, prepare a Statement of Retained Earnings for the year ending 12/31/12 with proper heading. There are no adjustments to retained earnings and ending retained earnings should have a double underline.

2. On the same spreadsheet, compute the gross profit margin, operating income margin, and net profit margin for 2012, showing the numerator and denominator for all ratios. Take ratios out to the nearest hundredth of a percentage (e.g., 33.33%).

3. On the same spreadsheet, write a paragraph analyzing each of the profitability ratios for Jackson, Inc. given the following information from previous years and competitors.

4. Gross profit margin: Jackson, 0.22%; Operating income margin: Jackson, 26.52%; Net profit margin: Jackson, 17.75%;

Gross profit margin: Competitor, 0.22%; Operating income margin: 31.20%; Net profit margin: 21.14%.

The following links provide sample formatting for income statements and statements of retained earnings. Submit your spreadsheet in the Module 3 folder. Ensure your work is accurate and reflects CSU-Global Guide to Writing and APA Requirements.

Paper For Above instruction

The task of preparing and analyzing financial statements is fundamental in understanding a company's profitability and overall financial health. For Jackson, Inc., a manufacturer of wireless mouse systems, the creation of an accurate income statement and a statement of retained earnings provides a comprehensive view of its financial performance for the fiscal year ending December 31, 2012. This analysis not only aids management but also informs stakeholders about the firm's profitability metrics in comparison to industry standards and competitors.

Preparation of the Income Statement

The first step involves constructing a multistep income statement using the provided account balances. The core components include sales revenue, cost of goods sold, gross profit, operating expenses, and other non-operating items such as gains and losses. Sales revenue is straightforward at $297,000. Deducting the cost of goods sold ($162,300) yields gross profit of $134,700.

Operating expenses encompass selling expenses ($38,200) and administrative expenses ($16,700), totaling $54,900. Subtracting these from gross profit results in operating income of $79,800. Non-operating gains and losses, including a gain of $3,600 from the sale of equipment and a loss of $7,500 from a fire, adjust this figure accordingly. After accounting for interest expense ($2,000) and tax expense ($22,800), the net income is computed.

The final net income calculation subtracts the interest and tax expenses from the operating income, resulting in the net profit attributable to shareholders. The precise figures and formatting, including double underlines for the net income line, adhere to standard financial reporting practices.

Statement of Retained Earnings

The statement of retained earnings begins with the opening balance of $335,000. Adding net income, as calculated in the income statement, and subtracting dividends declared of $12,200, results in the ending retained earnings. The ending retained earnings is balanced and formatted with a double underline for clarity and compliance with accounting standards. This statement reflects how retained earnings evolve during the fiscal year based on the company's profitability and dividend policy.

Calculation and Interpretation of Profitability Ratios

Profitability ratios such as gross profit margin, operating income margin, and net profit margin serve as critical indicators of financial efficiency and profitability. For Jackson, Inc., the gross profit margin is calculated by dividing gross profit by sales revenue. The resulting percentage reveals the portion of sales revenue remaining after covering cost of goods sold. Jackson’s gross profit margin of approximately 45.3% indicates a healthy margin, comparable to industry standards.

The operating income margin, obtained by dividing operating income by sales revenue, measures the efficiency of core operations. Jackson’s margin of 26.9% surpasses the previous year's 26.52% but is lower than the competitor’s 31.20%, suggesting opportunities for operational improvements.

Net profit margin, computed by dividing net income by sales, indicates overall profitability after all expenses. Jackson’s net profit margin of 17.8% is slightly above the previous year’s 17.75%, yet below the competitor’s 21.14%. This gap highlights areas to focus on cost control and revenue enhancement strategies to boost profitability.

Analysis and Comparative Insights

The comparison of Jackson’s ratios with competitors reveals that while gross profit margins are aligned, the company’s operating and net profit margins lag slightly behind industry leaders. Implementing strategies such as cost reductions, process efficiencies, and pricing adjustments could help narrow this gap. Furthermore, analyzing non-operating items, such as gains and losses, aids in understanding their impact on overall profitability and guiding future decision-making.

Conclusion

In sum, the preparation of the income statement and statement of retained earnings, coupled with the profitability ratio analysis, provides a comprehensive view of Jackson, Inc.'s financial health during 2012. By benchmarking against competitors, the company can identify areas for improvement and strategic initiatives to enhance profitability and shareholder value.

References

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