Page 67 - DCOM302_MANAGEMENT_ACCOUNTING

Management Accounting

Notes Balance Sheet on 31st March, 2005 of Poornima Traders Ltd.

Liabilities ` Assets `
Issued capital
4000 Equity shares of ` 100 each 4,00,000 Land and Building 3,00,000
Reserves 1,80,000 Plant and Machinery 1,60,000
Current liabilities 3,00,000 Stock 3,20,000
Profit & Loss A/c 1,20,000 Debtors 1,60,000

Cash at Bank 60,000
10,00,000 10,00,000
Calculate the following ratios:

(i) Gross profit ratio (ii) Operating ratio (iii) Operating profit ratio (iv) Net profi t ratio

(i) Gross profit ratio =

Gross profi t ratio = Gross profit × 100
Sales
While calculating the gross profit ratio, which sales should be taken into

consideration?
The net sales alone has to be taken into consideration for the computation of

calculating the gross profit ratio. What is meant by net sales ?
Net Sales = Gross sales – Sales Return

The firm has not earned any profit on the sales return made by its customers/
consumers. When the firm has not earned any profit out of the sales return, that

should be deducted from the gross sales. The chance of earning profit usually prevails

only at the moment of payment by the customers, but the customers who returned
the goods need not pay in this regard, which does not carry any opportunity for the
firm to earn profi t.

`400000
,
,
GP Ratio = × 100 = 40%
`10 00 000
,
,
(ii) Operating ratio =
+
+
Cost of goods sold Administration expenses Selling & Distribution expenses

r
× 100
Net sales
The information pertaining to cost of goods sold is not available directly.
The cost of goods sold could be found out in two different ways:
Cost of goods sold = opening stock + Purchases -Closing stock
Substitute the values in the above equation
= `1,50,000 + `6,50,000 - `2,00,000
= `6,00,000
Alternately, the cost of goods sold could be found out as follows:
Cost of goods sold = Sales - Gross profi t
= `10,00,000 - `4,00,000
= `6,00,000

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