Preparation of Trading and Profit & Loss Account for Manufacturing Entities

5 questions

All types5 Multiple choice3 Numeric1 Fill in the blank1

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

Financial Item	Amount (\text{NGN})
Sales of finished goods	$650{}000$
Opening stock of finished goods	$50{}000$
Cost of production transferred from Manufacturing Account	$380{}000$
Closing stock of finished goods	$60{}000$
Rent paid	$40{}000$
General administrative expenses	$36{}000$
Selling and distribution expenses	$25{}000$

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

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

Show answer & explanation

Answer: 175000

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

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.

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).

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.

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

Question 2Question →

The following balances were extracted from the accounting records of Kene Manufacturing Enterprise for the year ended 31st December 2025:

Financial Item	Amount (₦)
Sales of finished goods	500,000
Opening inventory of finished goods	40,000
Cost of goods produced	280,000
Closing inventory of finished goods	50,000

What is the gross profit of the enterprise for the year?

₦230,000

₦220,000

₦210,000

₦130,000

Show answer & explanation

Answer: ₦230,000

Answer

The gross profit of Kene Manufacturing Enterprise for the year is ₦230,000.

The gross profit is calculated by subtracting the Cost of Goods Sold from Sales. The Cost of Goods Sold is ₦40,000 + ₦280,000 - ₦50,000 = ₦270,000. Subtracting this from Sales of ₦500,000 gives ₦230,000.

Step-by-Step Solution

Calculate the Cost of Goods Sold (COGS)

COGS = ₦40,000 (Opening Inventory of Finished Goods) + ₦280,000 (Cost of Goods Produced) - ₦50,000 (Closing Inventory of Finished Goods) = ₦270,000

In the Trading Account of a manufacturing entity, Cost of Goods Sold is calculated by adding the production cost transferred from the Manufacturing Account to opening finished goods inventory and deducting closing finished goods inventory.

Calculate the Gross Profit

Gross Profit = ₦500,000 (Sales) - ₦270,000 (COGS) = ₦230,000

Gross Profit is obtained by subtracting the Cost of Goods Sold from total sales revenue.

Key Concept

Calculation of Gross Profit in the Trading Account of a Manufacturing Entity

Estimated Time:1m 0s

Question 3Question →

Bisi Manufacturing Company provided the following balances extracted from its accounting records at the end of the year:

Financial Item	Amount (\text{N})
Opening inventory of finished goods	15,000
Cost of production	80,000
Closing inventory of finished goods	20,000
Carriage outwards	5,000

What is the cost of goods sold for the period?

\text{N}75,000

\text{N}80,000

\text{N}115,000

\text{N}85,000

Show answer & explanation

Answer: \text{N}75,000

Answer

\text{N}75,000

In the Trading Account of a manufacturing entity, Cost of Goods Sold is obtained by adding the cost of production to the opening inventory of finished goods and subtracting the closing inventory of finished goods: \text{N}15,000 + \text{N}80,000 - \text{N}20,000 = \text{N}75,000. Carriage outwards is a distribution expense placed in the Profit and Loss Account.

Step-by-Step Solution

Identify the components of Cost of Goods Sold in a manufacturing Trading Account

\text{Cost of Goods Sold} = \text{Opening Inventory of Finished Goods} + \text{Cost of Production} - \text{Closing Inventory of Finished Goods}

Cost of production is transferred from the Manufacturing Account to act as the primary cost of goods available for sale.

Calculate the Cost of Goods Sold using given figures

\text{N}15,000 + \text{N}80,000 - \text{N}20,000 = \text{N}75,000

Carriage outwards is ignored in this section because it is an administrative/selling expense reported in the Profit and Loss Account.

Key Concept

Calculation of Cost of Goods Sold for Manufacturing Entities

Estimated Time:45s

Question 4Question →

The following summary of financial information was extracted from the accounting records of Highgrade Manufacturing Company for the year ended 31st December 2025:

Financial Item	Amount (₦)
Sales Revenue	520,000
Opening Stock of Finished Goods	60,000
Cost of Finished Goods Produced	310,000
Closing Stock of Finished Goods	50,000
Carriage Outwards	15,000
Administrative Expenses (including ₦5,000 prepaid)	35,000
Selling Expenses (excluding ₦8,000 accrued)	22,000

Based on the information above, complete the missing financial figures for the Trading and Profit & Loss Account.

Fill in the blanks below

The Gross Profit reported in the Trading Account is ₦, while the Net Profit reported in the Profit & Loss Account is ₦.

Show answer & explanation

Answer

The Gross Profit is ₦200,000 and the Net Profit is ₦125,000.

To calculate the Gross Profit, opening stock of finished goods (₦60,000) is added to the cost of finished goods produced (₦310,000) minus closing stock of finished goods (₦50,000) to arrive at a Cost of Goods Sold of ₦320,000. Subtracting this from Sales Revenue (₦520,000) gives a Gross Profit of ₦200,000. For Net Profit, operating expenses are adjusted for prepayments and accruals: Administrative Expenses (₦35,000 - ₦5,000 = ₦30,000), Selling Expenses (₦22,000 + ₦8,000 = ₦30,000), and Carriage Outwards (₦15,000). Total operating expenses of ₦75,000 subtracted from ₦200,000 Gross Profit yields a Net Profit of ₦125,000.

Step-by-Step Solution

Calculate Cost of Goods Sold (COGS)

COGS = ₦60,000 + ₦310,000 - ��50,000 = ₦320,000

Cost of goods sold in a manufacturing firm is calculated by adding the opening stock of finished goods to the cost of production (finished goods produced) and subtracting the closing stock of finished goods.

Calculate Gross Profit

Gross Profit = ₦520,000 - ₦320,000 = ₦200,000

Gross profit is determined by deducting the cost of goods sold from sales revenue.

Calculate Adjusted Total Operating Expenses

Carriage Outwards = ₦15,000; Adjusted Administrative Expenses = ₦35,000 - ₦5,000 = ₦30,000; Adjusted Selling Expenses = ₦22,000 + ₦8,000 = ₦30,000. Total Operating Expenses = ₦15,000 + ₦30,000 + ₦30,000 = ₦75,000

Prepaid expenses must be subtracted from paid administrative expenses, while accrued expenses must be added to selling expenses. Carriage outwards is a selling/distribution expense charged directly to the Profit and Loss Account.

Calculate Net Profit

Net Profit = ₦200,000 - ₦75,000 = ₦125,000

Net profit is calculated by deducting total operating expenses from gross profit.

Key Concept

Preparation of Trading and Profit & Loss Account for Manufacturing Entities

Estimated Time:2m 0s

Question 5Question →

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

Financial Item	Amount (\text{N})
Finished goods inventory (1st January 2025)	45,000
Finished goods inventory (31st December 2025)	55,000
Cost of finished goods transferred from factory	350,000
Sales revenue	520,000
Carriage outwards	12,000

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

\text{N}180,000

\text{N}168,000

\text{N}160,000

\text{N}70,000

Show answer & explanation

Answer: \text{N}180,000

Answer

The gross profit of Zenith Manufacturing Enterprise for the year ended 31st December 2025 is

\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

Calculate the Cost of Goods Sold (COGS) for finished goods

\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.

Calculate Gross Profit

\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

Preparation of Trading and Profit & Loss Account for Manufacturing Entities

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Common Mistakes

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Common Mistakes

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Common Mistakes