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Difficulty: MediumPreparation of Trading and Profit & Loss Account for Manufacturing Entities

Ade Manufacturing Enterprise provided the following extract from its records for the year ended 31st December 2025:

Financial ItemAmount (\text{NGN})
Sales of finished goods650000650{}000
Opening stock of finished goods5000050{}000
Cost of production transferred from Manufacturing Account380000380{}000
Closing stock of finished goods6000060{}000
Rent paid4000040{}000
General administrative expenses3600036{}000
Selling and distribution expenses2500025{}000

Additional Information:
At 31st December 2025, rent accrued amounted to NGN 4000\text{NGN } 4{}000.

What is the Net Profit of Ade Manufacturing Enterprise for the year ended 31st December 2025?

Answer: 175000 NGN

Answer

The Net Profit for Ade Manufacturing Enterprise for the year ended 31st December 2025 is NGN 175,000.
The correct Net Profit of NGN 175,000 is obtained by first deriving the Gross Profit of NGN 280,000 (Sales of NGN 650,000 minus COGS of NGN 370,000) and then deducting total period operating expenses of NGN 105,000 (Rent expense of NGN 44,000 including NGN 4,000 accrual, Administrative expenses of NGN 36,000, and Selling & distribution expenses of NGN 25,000).

Step-by-Step Solution

1
Calculate the Cost of Goods Sold (COGS)
\text{COGS} = \text{NGN } 50{}000 + \text{NGN } 380{}000 - \text{NGN } 60{}000 = \text{NGN } 370{}000
Cost of Goods Sold is obtained by adding the cost of production transferred from the manufacturing account to opening finished goods inventory and subtracting closing finished goods inventory.
2
Calculate the Trading Gross Profit
\text{Gross Profit} = \text{NGN } 650{}000 - \text{NGN } 370{}000 = \text{NGN } 280{}000
Gross profit is determined by deducting the cost of goods sold from total turnover (sales of finished goods).
3
Calculate Total Operating Expenses including accruals
\text{Total Expenses} = (\text{NGN } 40{}000 + \text{NGN } 4{}000) + \text{NGN } 36{}000 + \text{NGN } 25{}000 = \text{NGN } 105{}000
Accrued rent at year-end represents an unpaid expense of the current period and must be added to rent paid before aggregating administrative and selling expenses.
4
Calculate Net Profit
\text{Net Profit} = \text{NGN } 280{}000 - \text{NGN } 105{}000 = \text{NGN } 175{}000
Net Profit is computed by subtracting total operating expenses from the trading gross profit.

Key Concept

Preparation of Trading and Profit & Loss Account for Manufacturing Entities
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Preparation of Trading and Profit & Loss Account for Manufacturing Entities

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