Theory question 108
Business CalculationsThe data below relate to J.K. Limited as at December 31, 2021.
D
Inventory – 1st January 2021 80,000.00
Inventory – 31st January 2021 60,000.00
Purchases 180,000.00
Operating expenses 40,000.00
Discount received 20,000.00
Other current assets 150,000.00
Current liabilities 100,000.00
Calculate: (i) Gross profit; (ii) Net profit; (iii) Gross profit margin; (iv) Net profit margin; (v) Working capital; (vi) Rate of inventory turnover.
Show the model answer
Cost of goods sold = opening inventory + purchases − closing inventory = 80,000 + 180,000 − 60,000 = D200,000.
(i)–(iv): no sales figure is given, so gross profit, net profit and the two margins cannot be calculated. (If sales were S: gross profit = S − 200,000; net profit = gross profit + 20,000 discount received − 40,000 expenses; gross margin = gross profit ÷ S × 100; net margin = net profit ÷ S × 100.)
(v) Current assets = inventory 60,000 + other current assets 150,000 = D210,000
Working capital = 210,000 − 100,000 = D110,000
(vi) Average inventory = (80,000 + 60,000) ÷ 2 = D70,000
Rate of inventory turnover = 200,000 ÷ 70,000 = 2.86 times (about 3 times)
Include closing inventory in current assets.