Preparing Financial Statements Mark up and Margin

Aims of the Session Mark up. Margin. Cost of goods sold. Theft or drawings.

Mark Up Calculated on the cost of goods. Mark up puts profit on TOP of cost Calculated by Mark up = 35% 16,800 Sales price = 135% 48,000 x 1.35 = 64,800 Cost of goods = 100% Cost of goods = 48,000 64,800 X 35 135 Sales price 100 + profit percentage Mark up uses the cost price as 100% and ADDS the profit on the top of it: MARK –UP! Bit like VAT. 64,800 X 100 135

Margin Calculated on the selling price of goods. Selling price is 100% profit and cost of goods are part of this. Margin = 30% Profit = 18,600 Sales price = 100 % Cost of goods = 70% 43,400 30 X 62,000 100 70 X 62,000 100 Margin INcludes the profit as part of the selling price therefore needs to be reduced. If it helps draw a little box with the percentage in it to help work out the figures.

Differences in Calculations Mark Up Cost price is £100. Sales price is £125. Gross Profit x 100 = 25 25% Cost price 1 Margin Gross Profit x 100 = 25 20% Selling price 1 125

Cost of Goods Sold Gross profit = sales – cost of goods Cost of goods sold = opening inventory + purchases – closing inventory A trader applies a uniform mark up of 18%. The closing inventory for the year ending 30 June 20X4 was £16,250 and for the year ending 30 June 20X5 £17,520. If the purchases for the year ending 30 June 20X5 were £188,420, what was the gross profit for that year?

Scenario Answer A trader applies a uniform mark up of 18%. The closing inventory for the year ending 30 June 20X4 was £16,250 and for the year ending 30 June 20X5 £17,520. If the purchases for the year ending 30 June 20X5 were £188,420, what was the gross profit for that year? Work out cost of goods sold: Work out the additional 18% on top of the cost of goods sold, mark up. Cost of goods sold = Opening inventory + Purchases - Closing inventory 187,150 = 16,250 + 188,420 - 17,520 Mark up = 18% 33,687 Sales price = 118% 187,150 x 1.18 = 220,837 220,837 – 187,150 = Cost of goods = 100% Cost of goods = 187,150

300,000 – 303,000 = 3,000 drawings (or losses). A trader tells you that over the course of the year they have taken some items for personal use, but aren’t sure how much. They have completed a stock check and it’s valued at £22,000. Sales are £500,000, margin is 40%, opening inventory was £15,000, purchases throughout the year was £310,000 Work out cost of sales using margin. 500,000 x 0.6 = 300,000 Work out the cost of sales using cost of sales: 15,000 + 310,000 – 22,000 = 303,000 The difference will be stock taken as drawings: 300,000 – 303,000 = 3,000 drawings (or losses). This can be used for inventory losses such as theft, flood or fire as well as drawings. When using calculated figures take a step back and ask is this appropriate, if gross sales margin was 100% this year and 20% last question and double check the calculation. Exercise professional scepticism when looking at calculated figures. Also figures may differ from actual balance as this using calculated figures will involve a degree of averaging, which in reality wouldn’t happen.

Questions

Lesson Recap Mark up values the cost of sales at 100%. Margin values the selling price at 100% Cost of sales = OI + P – CI Assess whether figures are reasonable and exercise professional scepticism.

Exercises