Back to: FINANCIAL ACCOUNTING SS2
Welcome to class!
In today’s class, we will be talking about the introduction to accounting ratios. Enjoy the class!
Introduction to Accounting Ratios
Margin and Mark Up
The ability to calculate margin and mark up may be necessary to solve some incomplete record problems.
MARGIN
When gross profit is expressed as a fraction or percentages of selling price it is known as margin.
Example: N
The cost price of goods 100
Profit 25
Selling price 125
Then the margin = profit x 100 = 25 x 100 = 20% 0r 1/5
Selling price 1 125 1
MARK-UP
When gross profit is expressed as a percentage or fraction of the cost of sales is known as mark – up.
In the above example, mark – up is profit x 100 = 25% or ¼
Cost of goods sold 1
Relationship between margin and mark – up
Examples:
If mark – up Margin
Is (i) 2 then 2 = 2
5 5 + 2 7
(ii) 1 then 1 = 1
4 4+ 1 5
If margin mark -up
Is (i) 2 then 2 = 2
5 5 – 2 3
(ii) 1 then 1 = 1
3 3– 1 2
(iii) 1 then 1 = 1
7 7 – 1 6
NB:- making-up is always greater than the margin
FURTHER EXAMPLES
- Cost of sales: N3000. Margin 25%. Calculate sales revenue.
Solution: margin is 1 therefore Mark-up = 1 = 1
4 4 -1 3
N 3000 X 1 = PROFIT = N1000
3
Therefore Sales revenue = cost + profit = N (3000 + 1000)
= N 4000
NB: it is mark-up that is a percentage of cost hence the margin given in the question must be converted to mark-up to solve the above problem.
- Sales revenue: N7000. Make-up is 40%. Calculate the gross profit.
Solution: mark – up; is 2, therefore, Margin is 2 = 2
5 5 + 2 7
Therefore Gross profit = 2 x N7000 = N2000
7
- Maheen provides the following information for the year ended 31st 2003.
N
Stock at 1st Jan. 2003 9000
Stock at 31st Dec. 2003 11,000
Sales in the year ended 31st 84,000
Maheen sells her goods at a make – up of 331/3. Prepare Maheen’s trading account for the year ended 31st Dec. 2003 in as many details as possible.
Solution: This is a good example of a problem that is solved by working backwards
MAHEEN
Trading account for the year ended 31 Dec. 2003
N N
Sales (given) 84,000
Less cost of sales
Opening stock 1st Jan (given) 9000
Step 4 purchases (balance figure 3) 65000
Step 3 Gods available for sales (balancing figure 2) 74000
Less closing stock at 31 Dec. (given) 11000
Step 2 cost of sales (balancing fig 1) 63,000
Step 1 gross profile (1/4 x N84,000) 21,000
iii. STOCK LOST IN FIRE OR BY THEFT
The methods used for preparing account from incomplete records are also used to calculate the value of stock lost in a fire or by theft when detailed stock records have not been kept, or have been destroyed by fire.
You can solve this type of problem by preparing a pro forma “trading Account’ (It is described as “pro forma because it is not prepared like a normal trading account by transferring balances from ledger accounts.)
EVALUATION
- Define the following accounting terms
(a) Mark-up (b) Margin
- State the relationship between mark-up and margin.
Example
Uwa’s warehouse was burgled on 10th April 2004. the thieves stole most of the stock but left goods worth N1250. Uwa supplies the following information:
Extracts from Uwa’s Balance Sheet at 31 Dec. 2003
Stock N 30,000
Debtors N 40,000
Creditors N 20,000
Extracts from cash Book, 31 Dec. 2003 to 10 April 2004
Receipts from debtors N 176,000
Payments to suppliers N 120,000
Other information
Debtors at 10th April 2004 N 24000
Creditors at 10th April, 2004 N 26,000
Uwa sells his goods at a mark-up of 25%
Required: calculate the cost of the stolen goods
Solution: UWA
Pro forma Trading Account for the period 1st January, to 10th April 2004
N N
Sales (see wk 1 below) 160,000
Less cost of sales
Stock 1st Jan. 2004 30,000
Purchases (see wk 2 below) 126,000
156,000
Less closing 10/4/04
(Balancing figure) 28,000
Cost of sales 128,000
Gross profit (mark-up is 25% so margin 32,000
Is 20%, (N160,000 x 20%
Therefore Cost of stock stolen = N(28,000 – 12500 = N26,750 i.e. closing stock – stock left after burglary.
Workings (1) Debtors Control A/C
N N
1 Jan. Balance b/f 40,000 10 April Cash 176,000
10 April Sales Debtors out-
(balanced fig) 160,000 standing 24,000 200,000 200,000
Workings (2) Creditors Control A/C
N N
1 Jan. Bal b/f 20,000
10 April, cash 120,000 10 April purchases
(balancing fig.) 126,000
146,000 146,000
GENERAL EVALUATION
- State five features of capital expenditure
- State five characteristics of a depreciable asset
- List five advantages and three disadvantages of the straight line method of calculating depreciation
- List ten users of financial accounting information
- List six causes of depreciation of fixed assets
In our next class, we will be talking about Control Account. We hope you enjoyed the class.
Should you have any further question, feel free to ask in the comment section below and trust us to respond as soon as possible.
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