Calculating Values using Accounting Ratios (Cambridge International AS Accounting)

Calculating values using accounting ratios

What information can I find using the gross profit margin?

• The formula for margin is $\frac{\mathrm{Gross} \mathrm{profit}}{\mathrm{Revenue}}\times100$

  • This is given as a percentage

• You can use this percentage to find missing values

Worked Example The following information is given.

Revenue	$50 000
Gross profit margin	60%

Calculate the value of the cost of sales.

Answer:

• Calculate the gross profit

  • Multiply the revenue by the gross profit margin

60% × $50 000 = $30 000

• Calculate the cost of sales

  • Subtract the gross profit from the revenue

*$50 000 - $30 000 = $20 000

What information can I find using the mark-up?

• The formula for mark-up is $\frac{\mathrm{Gross} \mathrm{profit}}{\mathrm{Cost} \mathrm{of} \mathrm{sales}}\times100$

  • This is given as a percentage

• You can use this percentage to find missing values

• Revenue = Cost of sales + (Mark-up percentage × Cost of sales)

• If you know the mark-up and the revenue then you can also find the cost of sales

  • Find the revenue as a percentage of the cost of sales

    • Add the mark-up to 100%

  • Divide the revenue by this percentage to find the cost of sales

Worked Example The following information is given.

Revenue	$126 000
Mark-up	20%

Calculate the value of the cost of sales.

Answer:

• Calculate the revenue as a percentage of the cost of sales

  • Add the mark-up to 100%

20% + 100% = 120%

• Divide the revenue by the percentage

*$126 000 ÷ 120% = *$105 000

What information can I find using the rate of inventory turnover?

• The formula for* inventory turnover *is $\frac{\mathrm{Cost} \mathrm{of} \mathrm{sales}}{\mathrm{Average} \mathrm{inventory}}$

  • This is given as a number of times
  • The formula for average inventory is $\frac{\mathrm{Opening} \mathrm{inventory}+\mathrm{Closing} \mathrm{inventory}}{2}$

• You can use this rate of inventory turnover to find missing values

Worked Example Cogan Lovelace runs a party supplies store. It is not the practice of the business to keep a full set of accounting records. All sales and purchases are made on a cash basis. The following information is given for the year ended 31 December 2023.

Inventory at 1 January 2023	$60 000
Inventory at 31 December 2023	$75 000
Mark-up	33 ⅓%
Rate of inventory turnover	10 times

Prepare the trading section of the income for the year ended 31 December 2023.

Answer:

• Calculate the average inventory

  • Add the inventory values together and then divide by 2

\frac{\ 60 000 + $ 75 000}{2} = $ 67 500$

• Calculate the cost of sales

  • Multiply the average inventory by the rate of inventory turnover

$67 500 × 10 = $675 000

• Calculate the gross profit

  • Multiply the cost of sales by the mark-up

$675 000 × 33 ⅓% = $225 000

• Calculate the revenue

  • Add the gross profit to the cost of sales

$225 000 + $675 000 = $900 000

• Calculate the purchases

  • Cost of sales = Opening inventory + Purchases - Closing inventory
  • Purchases = Cost of sales + Closing inventory - Opening inventory

$675 000 + $75 000 - $60 000 = $690 000

• Prepare the trading section of the statement of profit or loss using the usual format

Final answer: Cogan Lovelace Final answer: Statement of Profit or Loss for the year ended 31 December 2023
	Final answer: $**	Final answer: $
Final answer: Revenue		Final answer: 900 000
Final answer: Less: Cost of sales
Final answer:** Opening inventory **	Final answer: 60 000
Final answer:** Purchases **	Final answer: 690 000
	Final answer: 750 000
Final answer:** Less: Closing inventory	Final answer: (75 000)	Final answer: (675 000)
Final answer: Gross profit		Final answer: 225 000