Week 4 – SS1 Second Term Financial Accounting Notes

WEEK FOUR
ACCOUNTING RATIOS AND INCOMPLETE RECORDS
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
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.
Solution
Mark-up =
=
= 20% or 0.2 or
Margin
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
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:

1. Profit
2. Purchases
3. 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

 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.

 You are required to calculate:

1. Margin

1. Purchase

1. Stock turnover in days
2. Gross profit
3. Sales
4. Margin
5. Prepare the trading, profit and loss account for the year ended 31 Dec. 2008.

Solution:        FOLARIN VENTURES

1. Margin = or = 20% or 0.2
2. Purchase

Creditors Ledger Control Account

 130,000 +110,000
2
440,000
                = 120,000
                 440,000
                = 99.5 days = 100 days

 
 
 Folarin Ventures
Trading and Profit and Loss Account for the period Ended 31 December 2008

 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:

1. Closing stock

1. Prepare trading, profit and loss account

1. 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

1. Closing stock = x + 30,000 = 20,000

   2

= x + 30,000 = 40,000
             = 40,000 – 30,000
Closing stock = x = N10,000

1. 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

1. A firm’s average stocks is N50,000 while the closing stock is N30,000. Calculate the opening stock:
   1. N40,000
   2. N30,000
   3. N70,000
   4. N50,000
2. The ratio between profit and sales is called
   1. Gross profit
   2. Net profit
   3. Mark-up
   4. Margin
3. The excess of opening capital over closing capital represents
   1. Gross profit
   2. Net profit
   3. Loss
   4. Sales
4. A business stock turnover time is 9, its average stocks is N60,000. Calculate its cost of goods sold
   1. N54,000
   2. N27,000
   3. N60,000
   4. N540,000
5. The record or book where credit sales could be generated is
   1. Cash book
   2. Creditors ledger
   3. Debtors ledger
   4. Statement of affairs

Fill in the Blanks

1. The number of times a business stock could be replenished is called _______________
2. If a business operational margin is 0.2. calculate the mark-up _______________
3. The act of recording a business transaction one in the book is called _________________
4. The financial summary prepared to ascertain a firm’s opening capital is called ________________
5. 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

1. 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:

   1. Cost of goods sold
   2. Net profit
   3. Net profit percentage
   4. Gross profit percentage
   5. Stock turnover
2. The following is a summary of the bank account of Mary Parker, a retail trader for the year 2008.

 You are given the following additional information:

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:

1. Trading, profit and loss account for the year

1. A balance sheet as at 31 December, 2008 (SSCE, June 1993).