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Difficulty: HardTrading Account and Gross Profit Calculation

An accountant preparing the financial statements for Prime Retail Enterprises compiled the following summary of operational balances at the end of the trading period:

- Gross sales: ₦250,000\text{₦}250,000
- Returns inwards: ₦10,000\text{₦}10,000
- Opening inventory: ₦45,000\text{₦}45,000
- Purchases: ₦160,000\text{₦}160,000
- Returns outwards: ₦8,000\text{₦}8,000
- Carriage inwards: ₦5,000\text{₦}5,000
- Carriage outwards: ₦7,000\text{₦}7,000
- Goods withdrawn by proprietor for personal use: ₦12,000\text{₦}12,000
- Closing inventory: ₦35,000\text{₦}35,000

What is the gross profit of Prime Retail Enterprises for the period?

  1. A
    ₦73,000\text{₦}73,000
  2. B
    ₦78,000\text{₦}78,000
  3. ₦85,000\text{₦}85,000Answer
  4. D
    ₦95,000\text{₦}95,000

Answer

The gross profit of Prime Retail Enterprises for the period is ₦85,000\text{₦}85,000.
The correct calculation evaluates Net Sales as ₦240,000\text{₦}240,000 (₦250,000−₦10,000\text{₦}250,000 - \text{₦}10,000) and Cost of Goods Sold as ₦155,000\text{₦}155,000 [Opening Inventory (₦45,000\text{₦}45,000) + Purchases (₦160,000\text{₦}160,000) - Returns Outwards (₦8,000\text{₦}8,000) - Drawings (₦12,000\text{₦}12,000) + Carriage Inwards (₦5,000\text{₦}5,000) - Closing Inventory (₦35,000\text{₦}35,000)]. Subtracting the cost of goods sold from net sales gives a gross profit of ₦85,000\text{₦}85,000. Note that carriage outwards (₦7,000\text{₦}7,000) is an operating expense transferred to the Profit and Loss Account and does not affect the Trading Account.

Step-by-Step Solution

1
Calculate Net Sales (Turnover)
Net Sales = Gross Sales - Returns Inwards = ₦250,000−₦10,000=₦240,000\text{₦}250,000 - \text{₦}10,000 = \text{₦}240,000
Returns inwards must be deducted from gross sales to arrive at the actual revenue generated from sales.
2
Calculate Adjusted Net Purchases
Net Purchases = Purchases - Returns Outwards - Goods Withdrawn + Carriage Inwards = ₦160,000−₦8,000−₦12,000+₦5,000=₦145,000\text{₦}160,000 - \text{₦}8,000 - \text{₦}12,000 + \text{₦}5,000 = \text{₦}145,000
Returns outwards and drawings of stock reduce the cost of purchases, while carriage inwards is a direct expense added to bring goods into the business.
3
Calculate Cost of Goods Sold (COGS)
COGS = Opening Inventory + Net Purchases - Closing Inventory = ₦45,000+₦145,000−₦35,000=₦155,000\text{₦}45,000 + \text{₦}145,000 - \text{₦}35,000 = \text{₦}155,000
Cost of goods available for sale (₦190,000\text{₦}190,000) minus unsold stock at year-end gives the cost of stock sold.
4
Calculate Gross Profit
Gross Profit = Net Sales - COGS = ₦240,000−₦155,000=₦85,000\text{₦}240,000 - \text{₦}155,000 = \text{₦}85,000
Gross profit is the difference between net turnover and the cost of goods sold during the trading period.

Key Concept

Trading Account and Gross Profit Calculation
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Topics

Trading Account and Gross Profit Calculation

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