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ACCT 002 Lecture Notes - Lecture 4: Cost Driver, Management Accounting, Fixed Cost

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blackpig616
15 Aug 2020
School
College of The Sequoias
Department
Accounting (ACCT)
Course
ACCT 002
Professor
cooper

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Document Summary

Gross margin is the difference between sales revenue and cost of goods sold: It shows how much the firm is making over and above the cost of the units sold. Gross margin does not equal operating income or profit as it is computed without subtracting selling and administrative expenses. If gross margin is positive, the firm is charging prices that cover the product cost. A company can compare gross margin percentage with the average for its industry to see if its experience is within the ballpark range for other firms in the industry. Gross margin percentage varies significantly by industry. As you saw in cornerstone 2. 7, selling and administrative expenses for the period are subtracted from gross margin to arrive at operating income. Operating income = gross margin selling and administrative expenses. Operating income is the key figure from the income statement; it is profit, and shows how much the owners are actually earning from the company.

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Related Questions

Vertical Analysis. Refer to the information of Cuneo Company above. 1- Prepare a common-size income statement for year 1, 2 and 3 by expressing each line item as a percentage of sale revenue. Cuneo Company Income Statements For years 1, 2, and 3 Year 1: Sales: $1,000,000 Less: Cost of goods sold: (700,000) Gross margin: $300,000 Less operating expenses: Selling expenses: (150,000) Administrative expenses: (50,000) Operating income: $100,000 Less: Interest expenses: (25,000) Income before taxes: $75,000 Year 2: Sales:$1,200,000 Less: Cost of goods sold: (700,000) Gross margin: $500,000 Less operating expenses: Selling expenses: (220,000) Administrative expenses:(60,000) Operating income:220,000 Less: Interest expenses: (25,000) Income before taxes: $195,000 Year 3: Sales: $1,700,000 Less: Cost of goods sold: (1,000,000) Gross margin: $700,000 Less operating expenses: Selling expenses: (250,000) Administrative expenses:(120,000) Operating income: $330,000 Less: Interest expenses: (25,000) Income before taxes: $305,000

Todrick Company is a merchandiser that reported the following information based on 1,000 units sold:

Sales $ 270,000
Beginning merchandise inventory $ 18,000
Purchases $ 180,000
Ending merchandise inventory $ 9,000
Fixed selling expense $ ?
Fixed administrative expense $ 10,800
Variable selling expense $ 13,500
Variable administrative expense $ ?
Contribution margin $ 54,000
Net operating income $ 16,200

2. Prepare a traditional format income statement.

Todrick Company
Traditional Income Statement
Sales
Cost of goods sold
Gross margin 0
Selling and administrative expenses:
Selling expense
Administrative expense
0
Net operating income

Using the financial statement information from below, create balance sheets and (traditional gross-margin format) income statements for the given years. • From those financial statements determine the following for the most current year:

1) Working Capital

2) Current Ratio

3) Quick Ratio

4) Inventory Turnover

5) Average Sales Period

6) Total Asset Turnover

7) Times Interest Earned Ratio

8) Debt-to-Equity Ratio

9) Gross Margin percentage

10) Cost of Goods Sold percentage 1

11) Net Profit Margin percentage

12) Return on Total Assets

13) Return on Equity

14) Earnings per Share

15) Book Value per Share

Year ended Dec. 31, 2016

Cost of Goods Sold 400,000

Cash 35,000

Selling & Administrative Expenses 160,000

Salaries Payable 40,000

Long-term liabilities 270,000

Finished Goods Inventory 55,000

Accounts Payable 20,000

Interest Expense 8,000

Income Tax Expense 30%

Sales Revenue (all on account) 700,000

Plant, Property, and Equipment, net 300,000

Accounts Receivable 60,000

Common Stock ($1 par) 120,000


Year ended Dec. 31, 2015

Cash 30,000

Accounts Receivable 50,000

Finished Goods Inventory 60,000

Plant, Property, and Equipment, net 320,000

Accounts Payable 20,000

Salaries Payable 20,000

Long-term liabilities 300,000

Common Stock ($1 par) 120,000