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Incomplete Records. It is sometimes possible to use accounting ratios to calculate missing figures. Three common ratios are: Margin Mark-up Stockturn. Accounting ratios. Profit margin: This can be expressed as the ratio of gross profit to selling price. It is expressed in percentage terms.
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It is sometimes possible to use accounting ratios to calculate missing figures. Three common ratios are: Margin Mark-up Stockturn Accounting ratios
Profit margin:This can be expressed as the ratio of gross profit to selling price. It is expressed in percentage terms. Margin = Gross profit x 100 Sales Calculation of margin
Mark–up: Thisis the amount by which the cost of a goodhas been increased to arrive at the selling price. Mark-up = Gross profit x 100 Cost of goods sold Calculation of mark-up
Stockturn: This is the number of times on average the stock changes throughout the year. Stockturn = Cost of goods sold Average stock Average stock = Opening stock + Closing stock 2 Calculation of stockturn
The following information is available for Diane Davis: Opening stock = £5,200 Gross margin = 30% Closing stock = £5,600 Sales = £160,000 Example: calculating purchases using ratios
We can now calculate the gross profit using the formula: Gross profit = sales × 30% Gross profit = 160,000 × 30% Gross profit = £48,000 We can draw up a trading account.
Diane Davis trading account We can now calculate the cost of sales and the purchases.
Vicky Taylor is a retailer who can supply the following information relating to the past trading year: Mark-up = 25% Purchases = £27,000 Opening stock = £2,450 Closing stock = £2,650 Calculate the sales. Example: calculating sales using ratios
We can draw up a trading account. Vicky Taylor trading account
We can now calculate the gross profit using the formula: Gross profit = cost of sales × 25% Gross profit = 26,800 × 25% Gross profit = £6,700 We can insert the missing figures in the trading account.
Simon Rock provided the following information regarding his business: Opening stock £10,000 Closing stock £14,000 Stockturn 8 times Mark-up 25% Calculate the purchases and sales. Calculating purchases and sales using ratios
Calculate the cost of sales using the stockturn ratio: Stockturn = Cost of sales Average stock or Stockturn × Average stock = Cost of sales 8 × (10,000+14,000/2) 96,000 Cost of sales = 96,000 We can now draw up a trading account.
We can now calculate the gross profit using the mark-up formula: Gross profit = 25% × 96,000 = 24,000 We can work out the sales and purchases, when we put this figure in the trading account.
In order to produce a set of accounts for a business, the total sales and purchases must be known. A business can often provide details of cash sales and purchases. In order to find the total credit sales and credit purchases, control accounts can be used. Calculation of sales and purchases using control accounts
Elizabeth Berry provided the following information: At the beginning of the financial year debtors were £5,610. During the year receipts from debtors amounted to £69,630. At the end of the year debtors owed her £7,710. We can find the total credit sales by constructing a control account.
If we balance the account we can calculate the missing figure for credit sales.
It is also possible to calculate credit sales without constructing a control account. Credit sales for the year = debtors at the end of year + receipts from debtors – debtors at the beginning of the year
Maz owed £1,910 to suppliers at the beginning of the year, £2,430 at the end of the year, and during the year he had paid £28,520 to suppliers. Calculate the credit purchases for the year. Calculating credit purchases
If we balance the account we can calculate the missing credit purchases figure for the period.
It is possible to calculate without drawing up a control account. Credit purchases for the year = creditors at the end of year + total paid to creditors – creditors at the beginning of the year
A statement of affairs is used to determine a business’s capital if the total of assets and liabilities is known. It lists assets and liabilities in a format similar to a balance sheet. Statement of affairs
Mark Hardy, a sole trader has provided the following information for his business. During the year Mark withdrew £12,000 for personal use. No new capital was introduced. Prepare a statement of affairs as at 1 January 2006 to calculate the opening capital. Prepare a statement of affairs as at 1 January 2007 to calculate the closing capital. Calculate profit using the formula Profit = closing capital – opening capital – capital introduced + drawings
Statement of affairs for Mark Hardy as at 1 January 2007 Profit = closing capital – opening capital – capital introduced + drawings Profit = 47,100 - 51,500 + 12,000 = 7,600
Inadequate record- keeping • Inadequate record-keeping can cause problems. The business may not be able to access up-to-date information about: • Debtors • Creditors • Sales • Purchases • Expenses • Etc
The business may run out of stock if no records of stock are held. Debtors may not receive up-to-date statements. Delay in receiving payments may increase bad debts. The business may not pay creditors on time and supplies may be stopped. Banks may be reluctant to provide loans.
Tips It is important to show calculations, particularly for purchases and sales, as marks are usually awarded for individual values, even though the final total may be incorrect.
