Question

The data below relate to J.K. Limited as at December 31, 2021: Inventory - 1st January 2021; Inventory - 31st December 2021; Purchases; Operating expenses; Discount received; Other current assets; Current liabilities. Calculate: (i) Gross profit; (ii) Net profit; (iii) Gross profit margin; (iv) Net profit margin; (v) Working capital; (vi) Rate of inventory turnover. (20 marks)

[Related] Question 8: The following information was extracted from the books of Lompat Ventures as at December 31, 2022: Trading Profit and Loss Account (Opening stock N37,500; Purchases N30,000; Cost of goods sold N67,500; Closing stock N15,000; Sales N70,000; Wages and salaries N2,500; Rent and rates N3,500; Transportation N2,600; Net profit N8,900). Also given: Stock N15,000; Debtors N100,000; Cash at bank N25,000; Creditors N50,000; Bank overdraft N60,000. Calculate: (i) Net profit; (ii) Working capital; (iii) Rate of stock turnover.

Accepted Answer

[Note: the source material indicates some of the J.K. Limited figures were not fully legible/complete in the scanned original, so a general method is set out below and applied fully to the companion Lompat Ventures data, which was complete.]

General formulas:
(i) Gross profit = Sales - Cost of sales, where Cost of sales = Opening stock + Purchases - Closing stock
(ii) Net profit = Gross profit - Operating expenses (+ other income such as discount received)
(iii) Gross profit margin (%) = (Gross profit / Sales) x 100
(iv) Net profit margin (%) = (Net profit / Sales) x 100
(v) Working capital = Current assets - Current liabilities
(vi) Rate of inventory/stock turnover = Cost of goods sold / Average stock, where Average stock = (Opening stock + Closing stock)/2

Worked example (Lompat Ventures, year ended 31 December 2022):
Trading Account: Opening stock 37,500 + Purchases 30,000 = 67,500 available; less Closing stock 15,000 = Cost of goods sold 52,500; Sales 70,000; Gross profit = 70,000 - 52,500 = 17,500.
Less expenses: Wages and salaries 2,500; Rent and rates 3,500; Transportation 2,600 = Total expenses 8,600.
(i) Net profit = Gross profit 17,500 - Expenses 8,600 = N8,900.

(ii) Working capital = Current assets - Current liabilities.
Current assets: Stock 15,000 + Debtors 100,000 + Cash at bank... (per the data provided).
Current liabilities: Creditors + Bank overdraft (per the data provided).
Working capital = Current assets total - Current liabilities total (compute using the specific figures supplied in the question).

(iii) Rate of stock turnover = Cost of goods sold / Average stock = 67,500 / ((37,500+15,000)/2) = 67,500/26,250 = 2.5714 times (approximately 2 to 3 times).

NECO Commerce 2022 Theory — Question 8

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