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Accounting-Financial Statements Igcse Edexcel

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  1. Financial-Statements-Of-A-Sole-Trader Igcse Edexcel
    2 主题
  2. Financial-Statements-Of-A-Partnership Igcse Edexcel
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  3. Incomplete-Records Igcse Edexcel
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  4. The-Calculation-And-Interpretation-Of-Accounting-Ratios Igcse Edexcel
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  5. Financial-Statements-Of-A-Manufacturer Igcse Edexcel
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  6. Adjustments-To-Financial-Statements Igcse Edexcel
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Exam code:4AC1

Profitability

What is profitability?

  • Profitability is a measure of the ability of a business to generate profits from its activities

    • This measures the ability to succeed in the future

What are the profitability ratios?

  • Profitability ratios assess a company’s ability to earn profits from sales, operations or assets

    • They compare profits to other values such as revenue, costs and capital employed

  • The main profitability ratios are:

    • Gross profit percentage

    • Mark-up

    • Profit for the year as a percentage of revenue

    • Return on capital employed

Gross profit percentage

What is the gross profit percentage?

What is the formula?

fraction numerator Gross space profit over denominator Revenue end fraction cross times 100

How should the value be written?

Write as a percentage (X%)

How should the value be rounded?

Round to two decimal places

What does the value mean?

The value represents the proportion of the revenue that is turned into gross profit

How can the ratio be improved?

  • Increase the selling price of the goods

  • Buy the goods from a cheaper supplier

  • If the gross profit percentage decreases then this suggests that:

    • The goods are being sold at a cheaper price than in previous years

      • Allowing more trade discounts has the same effect

    • The costs of goods have increased but their selling price has remained the same

Examiner Tips and Tricks

The gross profit percentage must be less than 100%. If you get an answer bigger than 100% then check your working.

Worked Example

Kaley is a sole trader. She provides the following information for the year ended 31 December 2023.

$

Revenue

128 000

Purchases

52 000

Inventory at 1 January 2023

8 000

Inventory at 31 December 2023

6 000

Calculate Kaley’s gross profit percentage. Your answer should be correct to two decimal places.

Answer

  • Calculate the cost of sales

    • Opening inventory + Purchases – Closing inventory

    • $8 000 + $52 000 – $6 000 = $54 000

  • Calculate the gross profit

    • Revenue – Cost of sales

    • $128 000 – $54 000 = $74 000

  • Calculate the gross profit percentage

    • fraction numerator Gross space profit over denominator Revenue end fraction cross times 100

    • fraction numerator 74 space 000 over denominator 128 space 000 end fraction cross times 100 equals 57.8125

  • Round to two decimal places

    • Gross margin = 57.81%

Mark-up

What is the mark-up?

What is the formula?

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