The profit of a business firm could be either Gross Profit or Net Profit.
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This is the total sales less
Cross Price: It is the same as mark-up which is the amount a seller adds to his cost or buying price to determine his selling price.
i.e. Gross Profit = Sales – Cost of Sales
It should be noted that the gross profit of a firm is not the true profit since other expenses are incurred in running the business. The gross profit, by itself, cannot, therefore, tell whether or not a business firm is making a headway. The most important thing to look at is the NET PROFIT.
This refers to the gross profit less the expenses of running the business. This is the
amount left for the owner or owners of the business as a reward for the risk taken. The success of the business is measured in terms of the Net Profit.
Expenses incurred in running a business include rent, rates, advertising depreciation, bad debts electricity bills wages and salaries transportation, carriage outwards, insurance etc.
ITEMS IN THE TRADING PROFIT AND LOSS ACCOUNT
- Returns inwards
- Returns outwards
- Carriage inwards
- Gross Profit or Gross Loss
- Expenses e.g. rent, wages, insurance etc
- Other operating incomes e.g. discount received commission received, bad debts recovered etc.
- Net Profit or Net Loss.
- Give a short description of information which should be found in:
(a) a trading account
(b) a profit and loss account
- Explain what is meant by each of the following:
(a) gross profit (b) net profit (c) net sales
This refers to the total net sales during a period. The turnover is variously referred to as the stock-turn, sales turnover or stock-turnover.
THE RATE OF TURNOVER (or Rate of Stock – turn)
This refers to the number of times average stock is sold during a given period, usually a year.
It is calculated by dwindling the cost of goods sold by average stock. This means that to find the rate of turnover first, the cost of goods sold must be calculated thus:
COST OF GOODS SOLD N
Opening Stock 5,000
Add purchases 35,000
less: Closing stock 8,000
COST OF GOODS SOLD 32,000
COST OF GOODS SOLD: N
Less: Gross profit 18,000
Secondly the average stock must be calculated thus:
- AVERAGE STOCK = OPENING STOCK + CLOSING STOCK
= 5000 + 8000 = 13000 = N 6,500
Finally find the rate of turnover thus:
- Rate of Turnover = Cost of goods sold
FACTORS AFFECTING THE RATE OF TURNOVER OF A BUSINESS
The number of times a trader buys goods and resells them determines the size of his gross profit. In other words, a trader’s gross profit can be increased by boosting his rate of turnover. The various measures to be applied to increase the rate of turnover of a business can be inferred by considering the following factors which affect the rate of turnover.
- Nature of the product.
- Advertisement and Sales Promotion
- Location of the business.
- Goodwill or reputation of the seller
- Wide variety of products offered for sale
- Reliability and frequency of supply
- Credit facilities.
- Application of modern sales techniques e.g. self services that encourage impulse buying
- Number of sales outlets or branches of the business.
- Distinguish between turnover and rate of turnover.
- If the cost of goods sold is N4000 and the stock is turned over five times yielding a profit of 10% on sale, calculate the:
(a) average stock
(b) gross profit
- The difference between cost and selling price gives______
(a) Trading loss (b) Net profit/loss (c) Gross profit or loss (d) Turnover
- The cost of transporting goods to customers is called ________
(a) carriage inwards (b) carriage outward (c) carriage paid (d) carriage forward
- The turnover of a firm may be affected by ________
(a) the demand for its products (b) the cost of its goods sold (c) its closing stock
(d) its net assets.
Use the following equation to answer questions 4 and 5.
Gross Profit = (Closing stock + P) less (Opening stock + G)
- What is P in the above equation
(a) purchases returns (b) net profit (c) sales (d) carriage outwards
- What is G in the above equation
(a) Sales return (b) carriage inward (c) purchases (d) sales
- Outline any seven factors, which might affect the rate of turnover
- Distinguish between gross profit and net profit.
GENERAL EVALUATION QUESTIONS
- Describe four types of risks that may be insured against under marine insurance
- State and explain five classes of shares a public limited company can issue
- Explain seven reasons for government participation in business enterprises
- State seven demerits of government participation in business enterprises
- State seven characteristics of a co-operative society