Financial Indicators.. Profitability Ratios/ Percentages

Question 1

Gross profit on Cost of Sales

Answer 1

Gross profit x 100
Cost of sales
Answer = x %

 Periodic Inventory System • Verify mark-up • Compare with the previous year and determine the extent of the drop in percentage. If the business uses the Periodic Inventory System and a Fixed Mark-up and the % mark-up is lower than as per policy, then the drop in mark-up can be attributed to the following: • Trade discounts were offered to bulk buyers • Stock was discounted during a stock clearance sale • Errors in calculating mark-up • Theft of stock If the business used a variable mark-up, the result would be an average mark-up of the previous year to see if there is an improvement or decline in the mark-up Continuous Inventory System(Perpetual) • Verify mark-up • Compare with the previous year and determine the extent of the drop in percentage. If the business uses the Perpetual/Continuous Inventory System and a Fixed Mark-up and the 5 mark-up is lower than as per policy, then the drop in mark-up cannot be attributed to theft of stock. It can be attributed to the following: • Trade discounts were offered to bulk buyers • Stock was discounted during a stock clearance sale • Errors in calculating mark-up • Theft of stock is not applicable.

Question 2

Gross Profit on Turnover

Answer 2

Gross profit x 100
Turnover Answer
= x %

• Check on GP Policy on Turnover to see if it is maintained
• For very R1 of sales, x % was the gross profit
• Compare with the previous year
• A drop in % could be attributed to the same reasons as in
the case of a drop in Gross profit on Cost of Sales

Question 3

Stock control.. Periodic inventory system

Answer 3

Fixed Mark-up
• Fixed mark-up will assist in monitoring stock
• Calculation of GP on COS must indicate
whether the mark-up is maintained
• If the mark-up is lower it indicates there are
stock shortages

Variable mark-up
• Stock shortages would be by comparing the average mark-up with the previous year
Other reasons for a drop in mark-up:
• Goods were discounted during a period of
sales
• Goods were discount to promote bulk sales

Question 4

Stock control.. Continuous inventory system

Answer 4

Take physical stock and compare it with the balance on the Trading Stock account to establish stock shortages

Question 5

Total Expenses on Turnover(sales)

Answer 5

Total expenses x 100
Turnover
• This shows what portion of the GP on Turnover is used for Operating expenses.
• Compare result with the previous year to see if the % is a lower (improvement in control over expenses) or if the % is higher (poor control over expenses)
• Identify specific expenses that need to be curbed
• Guard against decreasing salaries and wages to
improve control over expenses. (Note that macroeconomics is not only about making a profit but it is also a social responsibility insofar as creating jobs is concerned.
• Advertising expenditure seen in relation to sales.

Question 6

Net Income after Tax on Turnover

Answer 6

Net Income after tax x 100
Turnover

• If the drop in % from GP on turnover to Net profit after Tax on turnover is very high, then the focus must be on curbing expense including interest expense since the cost of financing will have an effect on the ratio (see 3 above)
• Compare result with the previous year to assess whether there is an improvement or deterioration in the control over expense