(a) Explain the following: (i) turnover (ii) rate of turnover (iii) net profit (b) The following information is taken from the balance sheet of XYZ Ltd: N o...
Question 1 Report
(a) Explain the following: (i) turnover (ii) rate of turnover (iii) net profit
(b) The following information is taken from the balance sheet of XYZ Ltd:
| N | |
| opening stock | 1,000 |
| purchases | 10,000 |
| sales | 15,000 |
| wages | 1,000 |
| closing stock | 5,000 |
You are required to calculate:
(i) the cost of goods sold
(ii) the rate of turnover
(iii) net profit
Answer Details
(a) Explanation of terms
- Turnover: The total value of net sales made by a business during a given trading period.
- Rate of turnover (rate of stockturn): The number of times the average stock held is sold and replaced within a trading period. It is found by dividing the cost of goods sold by the average stock.
- Net profit: The profit left after deducting all operating expenses from the gross profit; that is, gross profit less expenses.
(b) Calculations
(i) Cost of goods sold (COGS)
COGS = Opening stock + Purchases - Closing stock
COGS = N1,000 + N10,000 - N5,000 = N6,000
(ii) Rate of turnover
Average stock = (Opening stock + Closing stock) ÷ 2 = (1,000 + 5,000) ÷ 2 = N3,000
Rate of turnover = COGS ÷ Average stock = 6,000 ÷ 3,000 = 2 times
(iii) Net profit
Gross profit = Sales - COGS = 15,000 - 6,000 = N9,000
Net profit = Gross profit - Expenses (wages) = 9,000 - 1,000 = N8,000
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