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PART H: INTERPRETATION OF FINANCIAL STATEMENTS 

 

476

 

QUESTION 

Interpreting information II 

The statements of profit or loss for Egriff are given below.  

 

31 May 20X3 

31 May 20X4 

 

 

$'000 

 

$'000 

 

$'000 

 

$'000 

Revenue 

 

 

20,000 

 

 

26,000 

Cost of sales 

 

 

(15,400) 

 

 

(21,050) 

Gross profit 

 

 

4,600 

 

 

4,950 

Expenses 

 

 

 

 

 Administrative 

 

800 

 

 

900 

 

 Selling 

and 

distribution 

 

1,550 

 

 

1,565 

 

 Depreciation 

 

110 

 

 

200 

 

  Loan note interest 

 

      – 

 

 

105 

 

 

 

 

(2,460) 

 

 

(2,770) 

Profit for the year 

 

 

 2,140 

 

 

 2,180 

Egriff issued loan notes during the year to fund the expansion of the business. Non-current assets have 

increased from $3.8m in 20X3 to $4.6m in 20X4.  

Required 

(a) 

Calculate the following ratios for Egriff for both years. 

(i) 

Gross profit percentage 

(ii) 

Net profit percentage 

(b) 

Comment on the success of the business expansion using the ratios you have calculated. 

ANSWER 

(a) 

(i) 

Gross profit percentage 

Sales

profit

 

Gross

 100 

 

 

 

20X3 

 

20X4 

 

20,000

4,600  100 =  23.00% 

26,000

4,950  100 =  19.04% 

 

(ii)  Net profit percentage 

revenue

 

Sales

profit

 

Net

 100 

 

 

 

20X3 

 

20X4 

 

20,000

2,140  100 =  10.70% 

26,000

2,180  100 =  8.38% 

(b)  

The information given shows an expansion of the business in absolute terms; for example, revenue 

and non-current assets have increased. However, the profitability ratios have deteriorated. Both 

gross profit percentage and net profit percentage have gone down.  

 

The deterioration in the gross profit percentage may have arisen because margins are being 

squeezed in order to boost revenue, which has indeed increased. Costs have also increased.  

 

The decrease in net profit percentage arises partly because the gross profit percentage has 

decreased, but the main component of this is an increase in depreciation, as a result of the 

investment in non-current assets. 

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CHAPTER 26  

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  INTERPRETATION OF FINANCIAL STATEMENTS