Interpretation of final accounts
THE QUESTION below is presented with the recommended solution. You are to read it carefully, then match your thoughts with the reasoning given before you attempt to work the question. When you are finished working the question, match your answer with the one given. This should help tremendously in correcting your mistakes as well as enabling the recall of principles applied.
QUESTION
(a) During the year 2016, K. Lewis held an average stock at cost price of $22,560. His selling prices were obtained by adding 25% to the cost prices. [>1] His turnover for 2016 was $338,400.
His selling and administrative expenses were 12% of turnover.
CALCULATE
i. Lewis’ gross profit for 2016. ii. The rate of turnover of stock for 2016. iii. The net profit for 2016.
(b) For the year 2016, Lewis has reduced his markup on cost price to 20%. [>2] K. Lewis has also spent $4,000 on advertising. His average stock remains the same in amount and cost as in 2016, and selling and administrative expenses (excluding the additional advertising) will be
$37,792 for the full year.
Calculate the minimum rate of turnover of stock if he is to earn, at least, a net profit of $30,400. [>3]
REASONING
[>1] Cost price is 100%. Therefore, selling price is 100% + 25%. That is 125% of cost price.
[>2] Markup on cost price is now 20%. Therefore, selling price is 120% of cost price.
[>3] The formulae used in (a) (i), (ii) and (iii) are:
Net profit = Gross profit expenses.
Selling price percentage = Cost price % + gross profit %.
Rate of stock turnover =
Cost of goods sold average stock
SOLUTION
(a) (i) Turnover of sales (125%) = $338,400 Gross profit (25%) = $67,680 25% x $338,400/125% OR Turnover or sales (125%) = $338,400 Cost of goods sold (100%) = 100% x $338,400 = $270,720/125%
Therefore, gross profit = Sales - cost of goods sold $338,400 - $270,720 = $67,680
(ii) Rate of turnover of stock = Cost of goods sold
average stock = 100% /125% x $338,400/$22,560
= 12
(iii) Net profit = Gross profit - selling and administrative expenses = $67,680 - (12% x $338,400) = $27,070
(b) Net profit = Gross profit - (selling & administrative expenses + advertising)
$30,400 = gross profit - ($37, 792 + $4,000) $30,400 = gross profit - $41, 792
Gross profit = $30,400 + $41 ,792 = $72,192 Gross profit (20%) = $72, 192
Cost of goods sold (100%) = 100%/20%x $72 192 = $360,960
Rate of turnover of stock = Cost of goods sold average stock = $360,960 $22,560
Rate of turnover of stock = 16
EXAMINATION PREPARATION TIPS
As you get closer to your examination, to assist with your preparation, I encourage you to:
Form a small study group; four is a good number. Ensure the other three members have the same goal to achieve good results in their external examination as you. Make a team commitment to stay focused whenever and wherever you meet.
Choose the least distractive place and time to study.
EXAMINATION TIPS
Before answering an accounting question, read the data and requirements carefully and then think to recall the information you have learnt.
You will not get any marks for an answer that does not answer the question asked.
Separate the stationery and write the appropriate answer on the correct paper.
Identify the questions you answer accurately by putting the corresponding number.
This is where we end for this week. Join me next week as we continue to complete the syllabus. Grasp the concepts and retain them; you will need them as you progress to excellence. See you next week.