Incomplete Records. © Hodder Education 2008 Accounting ratios It is sometimes possible to use...
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Transcript of Incomplete Records. © Hodder Education 2008 Accounting ratios It is sometimes possible to use...
Incomplete RecordsIncomplete Records
© Hodder Education 2008
Accounting ratios
It is sometimes possible to use accounting ratios to calculate missing figures. Three common ratios are:
MarginMark-upStockturn
© Hodder Education 2008
Calculation of margin
Profit margin: This can be expressed as the ratio of gross profit to selling price. It is expressed in percentage terms.
Margin = Gross profit x 100 Sales
© Hodder Education 2008
Calculation of mark-up
Mark–up: This is the amount by which the cost of a good has been increased to arrive at the selling price.
Mark-up = Gross profit x 100 Cost of goods sold
© Hodder Education 2008
Calculation of stockturn
Stockturn: This is the number of times on average the stock changes throughout the year.
Stockturn = Cost of goods sold Average stock Average stock = Opening stock + Closing stock
2
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The following information is available for
Diane Davis:
Opening stock = £5,200
Gross margin = 30%
Closing stock = £5,600
Sales = £160,000
Example: calculating purchases using ratios
© Hodder Education 2008
We can now calculate the gross profit using the formula:
Gross profit = sales × 30%
Gross profit = 160,000 × 30%
Gross profit = £48,000
We can draw up a trading account.
© Hodder Education 2008
Diane Davis trading account
We can now calculate the cost of sales and the purchases.
£ £
Sales 160,000
Opening stock 5,200
Purchases
Closing stock 5,600
Cost of sales
Gross profit 48,000
© Hodder Education 2008
Diane Davis trading account
£ £
Sales 160,000
Opening stock 5,200
Purchases 112,400
117600
Closing stock 5,600
Cost of sales 112,00
Gross profit 48,000
© Hodder Education 2008
Vicky Taylor is a retailer who can supply the following information relating to the past trading year:
Mark-up = 25%
Purchases = £27,000
Opening stock = £2,450
Closing stock = £2,650
Calculate the sales.
Example: calculating sales using ratios
© Hodder Education 2008
We can draw up a trading account.
Vicky Taylor trading account
£ £
Sales
Opening stock 2,450
Purchases 27,000
29,450
Closing stock 2,650
Cost of sales 26,800
Gross profit
© Hodder Education 2008
We can now calculate the gross profit using the formula:
Gross profit = cost of sales × 25%
Gross profit = 26,800 × 25%
Gross profit = £6,700
We can insert the missing figures in the trading account.
© Hodder Education 2008
Vicky Taylor trading account
£ £
Sales 33,500
Opening stock 2,450
Purchases 27,000
29,450
Closing stock 2,650
Cost of sales 26,800
Gross profit 6,700
© Hodder Education 2008
Calculating purchases and sales using ratios
Simon Rock provided the following information regarding his business:
Opening stock £10,000Closing stock £14,000Stockturn 8 timesMark-up 25%
Calculate the purchases and sales.
© Hodder Education 2008
Calculate the cost of sales using the stockturn ratio:
Stockturn = Cost of salesAverage stock
orStockturn × Average stock = Cost of sales8 × (10,000+14,000/2) 96,000
Cost of sales = 96,000We can now draw up a trading account.
© Hodder Education 2008
Simon Rock trading account
£ £
Sales
Opening stock 10,000
Purchases
Closing stock 14,000
Cost of sales 96,000
Gross profit
© Hodder Education 2008
We can now calculate the gross profit using the mark-up formula:
Gross profit = 25% × 96,000
= 24,000
We can work out the sales and purchases, when we put this figure in the trading account.
© Hodder Education 2008
Simon Rock trading account
£ £
Sales 120,000
Opening stock 10,000
Purchases 110,000
120,000
Closing stock 14,000
Cost of sales 96,000
Gross profit 24,000
© Hodder Education 2008
Calculation of sales and purchases using control accounts
In order to produce a set of accounts for a business, the total sales and purchases must be known. A business can often provide details of cash sales and purchases. In order to find the total credit sales and credit purchases, control accounts can be used.
© Hodder Education 2008
Elizabeth Berry provided the following information:
At the beginning of the financial year debtors were £5,610.
During the year receipts from debtors amounted to £69,630.
At the end of the year debtors owed her £7,710.
We can find the total credit sales by constructing a control account.
© Hodder Education 2008
Dr Sales ledger control account Cr
£ £
Balance b/d 5,610 Bank 69,630
Balance c/d 7,710
If we balance the account we can calculate the missing figure for credit sales.
© Hodder Education 2008
Dr Sales ledger control account Cr
£ £
Balance b/d 5,610 Bank 69,630
Credit sales 71,730 Balance c/d 7,710
77,340 77,340
© Hodder Education 2008
It is also possible to calculate credit sales without constructing a control account.
Credit sales for the year = debtors at the end of year + receipts from debtors – debtors at the beginning of the year
© Hodder Education 2008
Calculating credit purchases
Maz owed £1,910 to suppliers at the beginning of the year, £2,430 at the end of the year, and during the year he had paid £28,520 to suppliers.
Calculate the credit purchases for the year.
© Hodder Education 2008
Dr Purchase ledger control accountCr
£ £
Bank 28,520 Balance b/d 1,910
Balance c/d 2,430
If we balance the account we can calculate the missing credit purchases figure for the period.
© Hodder Education 2008
Dr Purchase ledger control accountCr
£ £
Bank 28,520 Balance b/d 1,910
Balance c/d 2,430 Credit purchases 29,040
30,950 30,950
© Hodder Education 2008
It is possible to calculate without drawing up a control account.
Credit purchases for the year = creditors at the end of year + total paid to creditors – creditors at the beginning of the year
© Hodder Education 2008
Statement of affairs
A statement of affairs is used to determine a business’s capital if the total of assets and liabilities is known. It lists assets and liabilities in a format similar to a balance sheet.
© Hodder Education 2008
01/01/06 01/01/07
£ £
Motor vehicle 30,000 25,000
Stock 18,000 16,000
Debtors 6,000 8,000
Bank 2,500 4,300
Creditors 5,000 6,200
Mark Hardy, a sole trader has provided the following information for his business.
During the year Mark withdrew £12,000 for personal use.No new capital was introduced.
Prepare a statement of affairs as at 1 January 2006 to calculate the opening capital.
Prepare a statement of affairs as at 1 January 2007 to calculate the closing capital.
Calculate profit using the formulaProfit = closing capital – opening capital – capital introduced + drawings
© Hodder Education 2008
Statement of affairs for Mark Hardy as at 1 January 2006
£ £
Fixed assets
Motor vehicles 30,000
Current assets
Stock 18,000
Debtors 6,000
Bank 2,500
26,500
Current liabilities
Creditors 5,000
Woking capital 21,500
51,500
Capital 51,500
© Hodder Education 2008
Statement of affairs for Mark Hardy as at 1 January 2007
£ £
Fixed assets
Motor vehicles 25,000
Current assets
Stock 16,000
Debtors 8,000
Bank 4,300
28,300
Current liabilities
Creditors 6,200
Woking capital 22,100
47,100
Capital 47,100
Profit = closing capital – opening capital – capital introduced + drawings
Profit = 47,100 - 51,500 + 12,000 = 7,600
© Hodder Education 2008
Inadequate record-keepingInadequate record-keeping can cause problems. The business may not be able to access up-to-date information about:
DebtorsCreditorsSalesPurchasesExpensesEtc
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The business may run out of stock if no records of stock are held.
Debtors may not receive up-to-date statements.
Delay in receiving payments may increase bad debts.
The business may not pay creditors on time and supplies may be stopped.
Banks may be reluctant to provide loans.
© Hodder Education 2008
Tips
It is important to show calculations, particularly for purchases and sales, as marks are usually awarded for individual values, even though the final total may be incorrect.
© Hodder Education 2008
Tasks
Complete task sheet and OCR exam question.