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ACCA Applied Knowledge · Financial Accounting · Importance and purpose of analysis of financial statements

Rowan Co reported revenue of $800,000 in 20X1 and $920,000 in 20X2. Gross profit was $240,000 in 20X1 and $253,000 in 20X2. Which statement about the trend is correct?

Gross margin fell from 30.0% in 20X1 to 27.5% in 20X2. Gross profit of $240,000 on $800,000 revenue is 30%, while $253,000 on $920,000 is 27.5%, so profitability weakened even though revenue increased by 15%.

  1. AGross margin fell from 30.0% to 27.5% despite revenue growthCorrect
  2. BGross margin rose from 27.5% to 30.0%
  3. CGross margin was unchanged at 30.0%
  4. DGross margin fell from 30.0% to 25.3%

Explanation

20X1 margin = 240/800 = 30.0%. 20X2 margin = 253/920 = 27.5%. Revenue grew 15% but gross profit grew only 5.4%, so margin fell. The option showing a rise reverses the years; 25.3% wrongly uses revenue-based mistakes.

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