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

Zenith Manufacturing Enterprise extracted the following financial details at the end of its accounting year on 31st December 2025:

Financial ItemAmount (\text{N})
Finished goods inventory (1st January 2025)45,000
Finished goods inventory (31st December 2025)55,000
Cost of finished goods transferred from factory350,000
Sales revenue520,000
Carriage outwards12,000

What is the gross profit of the enterprise for the year ended 31st December 2025?

  1. \text{N}180,000Answer
  2. B
    \text{N}168,000
  3. C
    \text{N}160,000
  4. D
    \text{N}70,000

Answer

The gross profit of Zenith Manufacturing Enterprise for the year ended 31st December 2025 is N180,000\text{N}180,000.
The gross profit is calculated by deducting cost of goods sold from sales revenue. Cost of goods sold is opening finished goods (\text{N}45,000) plus transfer cost (\text{N}350,000) minus closing finished goods (\text{N}55,000), giving \text{N}340,000. Subtracting \text{N}340,000 from sales (\text{N}520,000) yields \text{N}180,000.

Step-by-Step Solution

1
Calculate the Cost of Goods Sold (COGS) for finished goods
Cost of Goods Sold=Opening Finished Goods Inventory+Cost of Goods Transferred−Closing Finished Goods Inventory=45,000+350,000−55,000=N340,000\text{Cost of Goods Sold} = \text{Opening Finished Goods Inventory} + \text{Cost of Goods Transferred} - \text{Closing Finished Goods Inventory} = 45,000 + 350,000 - 55,000 = \text{N}340,000
Cost of goods sold in a manufacturing entity comprises opening finished goods inventory plus factory production transfers minus closing finished goods inventory.
2
Calculate Gross Profit
Gross Profit=Sales Revenue−Cost of Goods Sold=520,000−340,000=N180,000\text{Gross Profit} = \text{Sales Revenue} - \text{Cost of Goods Sold} = 520,000 - 340,000 = \text{N}180,000
Gross profit is determined in the trading account by subtracting cost of goods sold from sales revenue. Carriage outwards is a selling expense charged to the profit and loss account, not the trading account.

Key Concept

Trading Account Gross Profit Determination for Manufacturing Entities
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Topics

Preparation of Trading and Profit & Loss Account for Manufacturing Entities

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