Special Accounting Procedures Chapter 5

Gross profit Mark-up & Margin Mark-up = Gross profit Cost price Can be either a fraction or a percentage Margin = Gross profit Selling price Can be either a fraction or a percentage

Gross profit Mark-up & Margin Inventory – 1/1/ Inventory – 31/12/ Purchases5,200 A mark-up rate of 20% is applied for sales Find the gross profit and sales revenue figures Sales ? Less COGS: - Inventory 1/1/ Add purchases5,200 Less inventory 31/12/2011(600) 5000 Gross Profit - ? You know: COGS + GP = Sales COGS +% mark-up = Sales SO % of 5,000 = 1,000 5, ,000 = 6,000 (sales) 6,000 1,000 SALES COGSGP ________ +

Gross profit Mark-up & Margin Inventory – 1/1/ Inventory – 31/12/ Sales6,400 A mark-up rate of 25% is applied for sales Find the gross profit and purchases figures Sales 6,400 Less COGS: - Inventory 1/1/ Add purchases? Less inventory 31/12/ Gross Profit - ? You know: COGS + GP = Sales Sales – GP = COGS SO.... Sales – 25% = COGS 6,400 – 1,600 = 4,800 4,800 5,100 1,600 SALES COGSGP ________ +

Gross profit Mark-up & Margin If the mark-up is known, to find the margin take the numerator to be a numerator of the margin, then plus the denominator plus the numerator for the margin’s denominator. Mark-up Margin

Gross profit Mark-up & Margin If the margin is known, to find the margin take the numerator to be a numerator of the margin, then plus the denominator less the numerator for the margin’s denominator. Margin Mark-up

Gross profit Mark-up & Margin Find the missing fractions: MarginMark-up 5/12 6/15 7/12 1/4 3/21 1/6 1/9 1/8

Manager’s commission Managers usually get a percentage of the profits as a commission. Assume that profits before the manager’s commission was deducted amounted to £8,400. the manager was entitled to 5% of the profits. 5% of £8,400 is £420. Therefore the profits remaining would be £7,980. However 5% of £7,980 is £399. What you should do is... % commission percentage commission X Profit before commission X 8,400= £400 The profits remaining are £8,000, and £400 is 5% of £8,000. therefore this is now correct

Performance ratios Return on capital employed ROCE (%) = Operating profit Capital employed X 100 Shows how successful the managers are at earning a profit from capital used in the business.

Calculations Fixed assets ฿ Land10,000 Vehicle5,000 Machines1,000 Current Assets Debtors1,000 Cash500 Stock2,000 Current Liabilities Creditors600 Bank loan800 Net-Current Assets (Working capital) Net assets Financed by: Profit / Loss10,000 Share capital8,100 Capital employed 2,100 18,100 Return on Capital Employed ROCE (%) = Operating profit Capital employed X 100 ROCE (%) = 10,000 18,100 X 100 =55% Analysis For every baht ( ฿ ) invested, the business makes 55% extra.

Performance ratios Gross profit margin Gross profit margin (%) = Gross profit Sales X 100 Shows how much gross profit is made for every $ earned

Calculations ฿ Sales turnover50,000 Cost of Sales8,000 Gross profit Expenses Rent15,000 Utility bills4,000 Wages 10,000 Net profit 42,000 13,000 Gross profit margin (%) = Gross profit Sales turnover X 100 Gross profit margin (%) = 42,000 50,000 X 100 =84% Analysis For every baht ( ฿ ) make from sales, 84% is kept as gross profit

Performance ratios Net profit margin Net profit margin (%) = Net profit Sales turnover X 100 Shows how much Net profit is made for every $ earned

Calculations ฿ Sales turnover80,000 Cost of Sales20,000 Gross profit Expenses Rent35,000 Utility bills10,000 Wages 10,000 Net profit 60,000 5,000 Net profit margin (%) = Net profit Sales turnover X 100 Net profit margin (%) = 5,000 80,000 X 100 =6% Analysis For every baht ( ฿ ) make from sales, 6% is kept as Net profit profit

Which ratio to use? Gross profit margin (%) = Gross profit Sales turnover X 100 Gross profit margin (%) = 42,000 50,000 X 100 =84% Analysis For every baht ( ฿ ) make from sales, 84% is kept as gross profit Net profit margin (%) = Net profit Sales turnover X 100 Net profit margin (%) = 5,000 80,000 X 100 =6% Analysis For every baht ( ฿ ) make from sales, 6% is kept as Net profit profit

Liquidity ratios Current Ratio Current ratio = Current assets Current liabilities Shows haw many times a business can pay its short term debts with current assets. A good current ratio would be between 1.5 : 1 – 2 : 1 A ratio less than 1 would mean that a business could not pay its short term debts, and could be forced to cease trading. (It has no working capital)

Calculations Fixed assets ฿ Land10,000 Vehicle5,000 Machines1,000 Current Assets Debtors1,000 Cash500 Stock2,000 Current Liabilities Creditors600 Bank loan800 Net-Current Assets (Working capital) Net assets Financed by: Profit / Loss10,000 Share capital8,100 Capital employed 2,100 18,100 Liquidity ratio =2.5:1 Analysis 2.5:1 means the business can pay it’s short term debts two and a half times. It has high liquidity! Current ratio = Current assets Current liabilities Current ratio = 3,500 1,400

Liquidity ratios Acid test ratio OR Liquidity ratio Acid test = Current assets - stock Current liabilities Similar to current ratio, however without stock because the nature of some companies may mean it is difficult to sell stock quickly (their stock is not liquid) for example a estate agent / car sales. A good acid test ratio is between 0.5 : 1 – 1 : 1

Calculations Fixed assets ฿ Land10,000 Vehicle5,000 Machines1,000 Current Assets Debtors1,000 Cash500 Stock50,000 Current Liabilities Creditors600 Bank loan800 Net-Current Assets (Working capital) Net assets Financed by: Profit / Loss10,000 Share capital8,100 Capital employed 50,100 79,600 18,100 Liquidity ratio =1:1 Analysis 1:1 means the business can JUST pay it’s short term debts. It has virtually no Liquidity! Acid test ratio = Current assets - stock Current liabilities Acid test ratio = 1,500 1,400