Under a situation whereby a firm or business accounting records were destroyed as a result of fire, flood or any other forms of natural disasters, such firm or business could still prepare its final account despite the facts that the information available will be very inadequate.
In order to prepare the final accounts under such situation, the accountant need to see his or her past experience and ingenuity to prepare the account. In addition, the accountant can make use of some accounting ratios such as the following:
- Mark – up
- Margin
- Rate of turnover
- Manager’s commission
Mark – up
| Profit |
| Cost Price |
| x 100 |
This is the ratio that expressed profit against the cost price of goods. The profit will be expressed as a percentage or fraction or decimal to the cost price.
Mark – up =
Illustration 5
A business made N10,000 profit from goods cost N50,000. You are required to calculate the mark-up.
| Profit |
| Cost Price |
| x 100 |
Solution
| 10,000 |
| 50,000
|
| x 100 |
Mark-up =
=
= 20% or 0.2 or
Margin
| Profit |
| Sales |
| x 100 |
| Profit |
| Sales |
| x 100 |
This is the ratio of profit to sales or selling price. It can as well be expressed as a percentage or fraction or decimal to sales.
Magin =
Illustration 6
A firm made N15,000 profit from a sales of N60,000. You are required to calculate the margin.
Solution
| 15,000 |
| 60,000 |
| x 100 |
Margin =
=
= 2.5% or 0.25 or ¼
In a situation whereby the mark-up is given, as well as, the selling price then the mark-up must be converted to margin. This can be explained as follows:
SP = Selling price
CP = Cost price
Profit = P
SP = CP + P (i)
SP = CP = P (ii)
SP – P = CP (iii)
Mark-up = =
Margin = =
Conversion of mark-up to margin
Mark-up = to margin = =
Mark-up = to margin = =
Mark-up = to margin = =
Conversion of margin to mark-up
Margin = to mark-up = =
Margin = to mark-up = =
Margin = to mark-up = =
Illustration 7
A business cost price is 100% and profit is 10%. Calculate mark-up and margin.
Solution
Mark-up = = = = 0.1
Margin = = = = = 0.091
Illustration 8
The following data were extracted from the books of God Grace Venture.
Opening stock 16,000
Sales 400,000
Closing stock 20,000
The business uses a uniform mark-up rate of 33 %
You are required to calculate:
- Profit
- Purchases
- Prepare the trading account
Solution
Mark-up 33 % =
Mark-up = = 25%
Margin = =
4P = 400,000
P = 400,000 ÷ 4
P = N100,000
Cost of sales = N400,000 – N100,000 = N300,000
Purchase = 300,000 + 20,000 – 16,000 = N304,000
God Grace Trading Account
| N | N | |
| Sales
Less: Cost of Sales Opening stock Add: Purchases Less: Closing stock Profit |
16,000 304,000 320,000 (20,000) |
400,000
300,000 100,000 |
Stock Turnover
This is also called the rate of turnover. This is the number of times a business stock will be turned over within a given period of time. It is computed as follows:
Rate of turnover = Cost of goods sold
Average of stocks
It can also be expressed in numbers of days as follows:
Average stocks (x 365 days)
Cost of goods sold
Average stock is computed as follows:
Opening stocks + Closing stocks
2
Manager’s Commission
This is an allowance granted to a business manager for a good performance and to encourage him or her to work harder in future. It is usually computed as follows:
Percentage of commission x Profit before commission
100 + Percentage of commission
Illustration 9
The following information was extracted from Folarin Ventures books in 2008.
| N | |
| Stock at 01/01/2008
Stock at 31/12/2008 Creditors at 01/01/2008 Creditors at 31/12/2008 Cash paid for goods during the year Mark-up 25% Selling expenses |
130,000
110,000 80,000 100,000 400,000
55,000 |
You are required to calculate:
- Margin
- Purchase
- Stock turnover in days
- Gross profit
- Sales
- Margin
- Prepare the trading, profit and loss account for the year ended 31 Dec. 2008.
Solution:
FOLARIN VENTURES
- Margin = or = 20% or 0.2
- Purchase
Creditors Ledger Control Account
| N | N | ||
| Bal c/f
Cash paid |
100,000
400,000 500,000 |
Bal. b/f
Purchases (credit) |
80,000
420,000 500,000 |
130,000 +110,000
| x 365 |
2
440,000
| x 365 |
= 120,000
440,000
= 99.5 days = 100 days
Folarin Ventures
Trading and Profit and Loss Account for the period Ended 31 December 2008
| N | N | |
| Sales | 550,000 | |
| Opening stock | 130,000 | |
| Add: Purchase | 420,000 | |
| 550,000 | ||
| Less: Closing stock | ||
| 440,000 | ||
| Gross profit | 110,000 | |
| Less: Expenses | (55,000) | |
| Net profit | 55,000 |
Percentage of gross profit to sales = 110,000 x 100 = 20%
550,000
Percentage of Net profit to sales = 55,000 x 100 = 10%
550,000
Illustration 10
Madam Adeotun produces the following data from her books.
N
Stock at the beginning 30,000
Purchases 27,000
The mark-up on cost of sales is 50%. Her average stock during the year was N20,000. You are required to calculate:
- Closing stock
- Prepare trading, profit and loss account
- Ascertain the total amount of profit and loss expenditure that she must not exceed if she is to maintain a net profit on sales of 10%
Solution
Let x represent closing stock
- Closing stock = x + 30,000 = 20,000
2
= x + 30,000 = 40,000
= 40,000 – 30,000
Closing stock = x = N10,000
Madam Adeotun Trading, Profit and Loss Account
| N | N | |
| Sales (290,000 + 145,000)
Less: Cost of sales Opening prayer Add: Purchases
Less: Closing stock
Gross profit (0.5 x 290,000) Less: Expenses Net profit (0.1 x 435,000) |
30,000 270,000 300,000 (10,000)
|
435,000
290,000 145,000 (101,500) 43,500 |
Exercise
Objective Questions
- A firm’s average stocks is N50,000 while the closing stock is N30,000. Calculate the opening stock:
- N40,000
- N30,000
- N70,000
- N50,000
- The ratio between profit and sales is called
- Gross profit
- Net profit
- Mark-up
- Margin
- The excess of opening capital over closing capital represents
- Gross profit
- Net profit
- Loss
- Sales
- A business stock turnover time is 9, its average stocks is N60,000. Calculate its cost of goods sold
- N54,000
- N27,000
- N60,000
- N540,000
- The record or book where credit sales could be generated is
- Cash book
- Creditors ledger
- Debtors ledger
- Statement of affairs
Fill in the Blanks
- The number of times a business stock could be replenished is called _______________
- If a business operational margin is 0.2. calculate the mark-up _______________
- The act of recording a business transaction one in the book is called _________________
- The financial summary prepared to ascertain a firm’s opening capital is called ________________
- If a manager is qualified for 7½% commission on profit before the commission is N15,000. Calculate the commission that would accrue to the manager.
Assignment
Essay Type Questions
- The following information was extracted from the book of Olaoni.
| N | |
| Sales
Opening stock Closing stock Expenses Purchases |
45,000
20,000 30,000 15,000 25,000 |
You are required to calculate the following:
- Cost of goods sold
- Net profit
- Net profit percentage
- Gross profit percentage
- Stock turnover
- The following is a summary of the bank account of Mary Parker, a retail trader for the year 2008.
| Receipts | N | N |
| Balance b/f
Shop takings Payments Creditors Rent and rates drawings |
1,448
34,722
28,364 1,488 5,816 |
You are given the following additional information:
| 01/01/2008 | 31/12/2008 | |
| N | N | |
| Furniture
Stock Debtors Creditors |
1,000
5,260 2,900 3,750 |
1,000
4,380 3,270 3,946 |
During the year, wages amounting to N1,300 and N220 general expenses were paid in cash out of shop takings. All the remaining shop taking were paid into the bank and all other payments were made by cheque.
You are required to prepare:
- Trading, profit and loss account for the year
- A balance sheet as at 31 December, 2008 (SSCE, June 1993).
See also
ADMISSION OF NEW PARTNER AND RETIREMENT OF AN EXISTING PARTNER IN CONTINUING BUSINESS
GOODWILL
ISSUE OF SHARES
THE FINAL ACCOUNTS OF LIMITED LIABILITY COMPANIES
COMPANY ACCOUNTS