1. Preparing Financial Statements Mark up and Margin

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

3. 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

4. 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.

5. 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

6. 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?

7. 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

8. 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 – 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.

9. Questions

10. 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.

11. Exercises