Calculating Values using Accounting Ratios (Edexcel IGCSE Accounting)

Spec point — IGCSE_ACCOUNTING:S4.171

Calculating values using accounting ratios

What information can I find using the gross profit percentage?

• The formula for the gross profit percentage 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 percentage	60%

Calculate the value of the cost of sales.

Answer

• Calculate the gross profit

  • Multiply the revenue by the gross profit percentage
  • 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 profit for the year as a percentage of revenue?

• The formula for the profit for the year as a percentage of revenue is $\frac{\mathrm{Profit} \mathrm{for} \mathrm{the} \mathrm{year}}{\mathrm{Revenue}}\times100$

  • 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
Profit for the year as a percentage of revenue	10%

Calculate the profit for the year.

Answer

• Calculate the profit for the year

  • Multiply the revenue by the percentage
  • *$50 000 × 10% = *$5 000

What information can I find using the return on capital employed?

• The formula for the return on capital employed is $\frac{\mathrm{Profit} \mathrm{for} \mathrm{the} \mathrm{year}}{\mathrm{Capital} \mathrm{employed}}\times100$

  • This is given as a percentage

• You can use this percentage to find missing values

Worked Example The following information is given.

Profit for the year	$10 000
Non-current liabilities	$15 000
Return on capital employed	25%

Calculate the equity.

Answer

• Calculate the capital employed

  • Divide the profit for the year by the percentage
  • $10 000 ÷ 25% = $40 000

• Calculate the equity

  • Subtract the non-current liabilities from the capital employed
  • *$40 000 - $15 000 = $25 000