incomplete records
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Incomplete Records. It is sometimes possible to use accounting ratios to calculate missing figures. Three common ratios are: Margin Mark-up Stockturn. Accounting ratios. Profit margin: This can be expressed as the ratio of gross profit to selling price. It is expressed in percentage terms. - PowerPoint PPT PresentationTRANSCRIPT
Incomplete RecordsIncomplete Records
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Accounting ratiosIt is sometimes possible to use accounting ratios to calculate missing figures. Three common ratios are:MarginMark-upStockturn
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Calculation of margin
Profit margin: This can be expressed as the ratio of gross profit to selling price. It is expressed in percentage terms.
Margin = Gross profit x 100 Sales
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Calculation of mark-upMark–up: This is the amount by which the cost of a good has been increased to arrive at the selling price.
Mark-up = Gross profit x 100 Cost of goods sold
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Calculation of stockturnStockturn: This is the number of times on average the stock changes throughout the year.
Stockturn = Cost of goods sold Average stock Average stock = Opening stock + Closing stock
2
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The following information is available for Diane Davis:
Opening stock = £5,200Gross margin = 30%Closing stock = £5,600Sales = £160,000
Example: calculating purchases using ratios
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We can now calculate the gross profit using the formula:
Gross profit = sales × 30%
Gross profit = 160,000 × 30%
Gross profit = £48,000
We can draw up a trading account.
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Diane Davis trading account
We can now calculate the cost of sales and the purchases.
£ £Sales 160,000Opening stock 5,200Purchases
Closing stock 5,600Cost of salesGross profit 48,000
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Diane Davis trading account
£ £Sales 160,000Opening stock 5,200Purchases 112,400
117600Closing stock 5,600Cost of sales 112,00Gross profit 48,000
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Vicky Taylor is a retailer who can supply the following information relating to the past trading year:Mark-up = 25%Purchases = £27,000Opening stock = £2,450Closing stock = £2,650Calculate the sales.
Example: calculating sales using ratios
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We can draw up a trading account.Vicky Taylor trading account
£ £SalesOpening stock 2,450
Purchases 27,00029,450
Closing stock 2,650
Cost of sales 26,800
Gross profit
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We can now calculate the gross profit using the formula:
Gross profit = cost of sales × 25%
Gross profit = 26,800 × 25%
Gross profit = £6,700
We can insert the missing figures in the trading account.
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Vicky Taylor trading account
£ £Sales 33,500Opening stock 2,450
Purchases 27,00029,450
Closing stock 2,650
Cost of sales 26,800
Gross profit 6,700
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Calculating purchases and sales using ratiosSimon Rock provided the following information regarding his business:
Opening stock £10,000Closing stock £14,000Stockturn 8 timesMark-up 25%
Calculate the purchases and sales.
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Calculate the cost of sales using the stockturn ratio:
Stockturn = Cost of salesAverage stock
orStockturn × Average stock = Cost of sales8 × (10,000+14,000/2) 96,000
Cost of sales = 96,000We can now draw up a trading account.
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Simon Rock trading account£ £
SalesOpening stock 10,000
Purchases
Closing stock 14,000
Cost of sales 96,000
Gross profit
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We can now calculate the gross profit using the mark-up formula:
Gross profit = 25% × 96,000= 24,000
We can work out the sales and purchases, when we put this figure in the trading account.
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Simon Rock trading account£ £
Sales 120,000Opening stock 10,000
Purchases 110,000120,000
Closing stock 14,000
Cost of sales 96,000
Gross profit 24,000
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Calculation of sales and purchases using control accountsIn order to produce a set of accounts for a business, the total sales and purchases must be known. A business can often provide details of cash sales and purchases. In order to find the total credit sales and credit purchases, control accounts can be used.
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Elizabeth Berry provided the following information:At the beginning of the financial year debtors were £5,610.During the year receipts from debtors amounted to £69,630.At the end of the year debtors owed her £7,710. We can find the total credit sales by constructing a control account.
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Dr Sales ledger control account Cr
£ £
Balance b/d 5,610 Bank 69,630
Balance c/d 7,710
If we balance the account we can calculate the missing figure for credit sales.
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Dr Sales ledger control account Cr
£ £
Balance b/d 5,610 Bank 69,630Credit sales 71,730 Balance c/d 7,710
77,340 77,340
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It is also possible to calculate credit sales without constructing a control account.
Credit sales for the year = debtors at the end of year + receipts from debtors – debtors at the beginning of the year
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Calculating credit purchasesMaz owed £1,910 to suppliers at the beginning of the year, £2,430 at the end of the year, and during the year he had paid £28,520 to suppliers.
Calculate the credit purchases for the year.
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Dr Purchase ledger control accountCr
£ £
Bank 28,520 Balance b/d 1,910Balance c/d 2,430
If we balance the account we can calculate the missing credit purchases figure for the period.
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Dr Purchase ledger control accountCr
£ £
Bank 28,520 Balance b/d 1,910Balance c/d 2,430 Credit
purchases 29,040
30,950 30,950
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It is possible to calculate without drawing up a control account.
Credit purchases for the year = creditors at the end of year + total paid to creditors – creditors at the beginning of the year
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Statement of affairsA statement of affairs is used to determine a business’s capital if the total of assets and liabilities is known. It lists assets and liabilities in a format similar to a balance sheet.
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01/01/06 01/01/07
£ £Motor vehicle 30,000 25,000
Stock 18,000 16,000
Debtors 6,000 8,000
Bank 2,500 4,300
Creditors 5,000 6,200
Mark Hardy, a sole trader has provided the following information for his business.
During the year Mark withdrew £12,000 for personal use.No new capital was introduced.
Prepare a statement of affairs as at 1 January 2006 to calculate the opening capital.
Prepare a statement of affairs as at 1 January 2007 to calculate the closing capital.
Calculate profit using the formulaProfit = closing capital – opening capital – capital introduced + drawings
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Statement of affairs for Mark Hardy as at 1 January 2006
£ £Fixed assets
Motor vehicles 30,000
Current assets
Stock 18,000
Debtors 6,000
Bank 2,500
26,500
Current liabilities
Creditors 5,000
Woking capital 21,500
51,500
Capital 51,500
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Statement of affairs for Mark Hardy as at 1 January 2007
£ £Fixed assets
Motor vehicles 25,000
Current assets
Stock 16,000
Debtors 8,000
Bank 4,300
28,300
Current liabilities
Creditors 6,200
Woking capital 22,100
47,100
Capital 47,100
Profit = closing capital – opening capital – capital introduced + drawings
Profit = 47,100 - 51,500 + 12,000 = 7,600
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Inadequate record-keepingInadequate record-keeping can cause problems. The business may not be able to access up-to-date information about:
DebtorsCreditorsSalesPurchasesExpensesEtc
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The business may run out of stock if no records of stock are held.Debtors may not receive up-to-date statements.Delay in receiving payments may increase bad debts.The business may not pay creditors on time and supplies may be stopped. Banks may be reluctant to provide loans.
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TipsIt is important to show calculations, particularly for purchases and sales, as marks are usually awarded for individual values, even though the final total may be incorrect.
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TasksComplete task sheet and OCR exam question.