Using gross profit percentage and inventory turnover to evaluate two leading companies Hewlett Packard and Apple Computer are competitors. The companies reported these amounts, in billions:
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Hewlett Packard Company Statement of Earnings (Adapted) |
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Fiscal Years |
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2006 |
2005 |
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Net sales |
$73.6 |
$68.9 |
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Cost of sales |
55.2 |
52.6 |
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Selling, general, and administrative expenses |
11.3 |
11.2 |
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Hewlett Packard Company Balance Sheet (Adapted) |
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Year End |
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2006 |
2005 |
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Assets |
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Cash and cash equivalents |
$16.4 |
$13.9 |
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Accounts receivable |
10.9 |
9.9 |
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Inventories |
7.8 |
6.9 |
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Apple Computer, Inc. Statement of Operations (Adapted) |
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Fiscal Years |
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2006 |
2005 |
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Net sales |
$19.3 |
$13.9 |
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Cost of sales |
13.7 |
9.9 |
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Selling, general, and administrative expenses |
2.4 |
1.9 |
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Apple Computer, Inc. Balance Sheet (Adapted) |
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Year End |
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2006 |
2005 |
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Assets |
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Cash and cash equivalents |
$6.4 |
$3.5 |
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Accounts receivable |
1.3 |
0.9 |
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Inventories |
0.3 |
0.2 |
Required
1. Compute both companies’ gross profit percentage and their rate of inventory turnover during 2006.
2. Can you tell from these statistics which company should be more profitable in percentage terms? Why? What other important category of expenses do the gross profit percentage and the inventory turnover ratio fail to consider? (Challenge)