COM4: BUSINESS CALCULATION

This unit is about business calculations and it has details about balance sheets among other things.

 

BUSINESS CALCULATION

Definition of key terms

  • Assets

Assets constitute all these things or items that a business owns and have value eg stock, machinery, buildings furniture, land, cash at hand, cash at bank, debaters, cars etc.

Assets are categorized into two;

  1. Current assets
  2. Fixed assets
  3. Current assets

These are assets used for the day to day trading and they can easily or quickly be converted into cash. The business or organization holds them for a short period of time usually less than a year because they keep circulating in the business. Examples include; stock debtors, cash at hand, cash at bank, prepaid expenses/ prepayments, accrued incomes.

  1. Fixed assets

These are properties of the business which are acquired for continuous usage in other words they are not for resale. They are static or permanent in nature, in other words, they are not for resale.

They are static or permanent in nature and are retained in business for a considerable period of time. Examples include; land, machinery, buildings ,vehicles, furniture.

  • Liabilities

Liabilities are debts that a business owes other people. Liabilities are also categorized into two;

  1. Current liabilities
  2. Long term liabilities
  3. Current liabilities

These are debts that are payable in the near future usually within a year examples include salary/ wage, taxes, bills payable, creditors, overdrafts, dividends, rent and insurance etc

  1. Long term liabilities

These are debts that are payable after a long period of time. They may take several years before they are cleared eg bank loans, debentures, mortgages, and capital.

NB: if a business has more assets than liabilities, it is said to be solvent ie it’s in a position to meet is debts from its own recourses. If liabilities exceed assets it is said to be insolvent ie when a business cannot meet its debts from its own resources.

Whenever insolvency is not same as bankruptcy because an insolvent business may continue trading while a bankrupt business ceases to function and its assets are even sold off.

  • Capital

The capital of the business is the many or physical items that have been invested in the business with the aim of making profits like the fixed assets. Capital takes different forms;

  1. Capital owned

This is the total amount of money invested in the business by its owners. It’s the net worth or the net value of the assets belonging to the owners.  If the business winds up, this money goes back to the owners. It is also known as owner equity.

Capital owned = Total assets – Total liabilities

A good example of capital owned is share capital.

  1. Liquid capital

This comprises of all current assets minus physical stock

Liquid capital = Current Assets – Stock

All assets that can easily be converted to cash like cash at hand, cash at bank, debtors etc minus stock are what comprises of liquid capital.

  1. Working capital

This is the capital that is needed for the daily running of the business. The capital constantly changes depending on the level and performance of a business at particular time. Working capital will change due to purchase of stock payment wages and other daily transaction.

Working capital = Current Assets – Current liabilities

WC      =          CA      –           CL

  1. Capital employment

This is the sum of fixed assets and working capital.

Capital employed = Fixed Assets + Working capital

CE       =          FA       +          WC

  1. Fixed capital

This is the same as fixed assets.

  • Debtors

This is a person who owes money to the business therefore a debtor is an asset to the business.

  • Creditors

Are people who the business owes money therefore a creditor is a liability to the business.

  • Financial statements

BALANCE SHEET

A balance sheet is a statement which shows the financial stand of a business at a given date. A balance sheet has two sides; the assets on one side (right hand) and liabilities on the other. The two must balance and the balance sheet question shows that;

Assets = liabilities

A       =   C + L

C       =    A – L

ILLUSTRATION OF A BALANCE SHEET

Musoke’s balance sheet as at 15th – 06 – 2007

capital

 

Prepare a balance sheet and calculate the following;

  1. Fixed assets
  2. Current assets
  • Working capital
  1. Capital employed

 

 

 

book of accounts

 

Calculate

  1. The value of current liabilities
  2. Current assets
  • Working capital
  1. Capital employed

 

Solution

  1. Value of current liabilities = rent + Sunday creditors

= 2,800 + 33,000

= 35,800 shs

 

  1. Current assets             = debtors + bank balance

= 30,000 + 8,000

= 38,000 shs

 

  • Working capital = current assets – current liabilities

= 38,000 – 35,800

= 13,800 shs

 

  1. Capital employed = fixed assets + working capital

Fixed assets                                         = furniture + vehicles + buildings

= 1,820,000

Capital employed                                = 1,820,000 + 2,200

= 1,822,200 shs

sheet

 

Calculate

  1. Working capital
  2. Gross capital employed and net capital employed
  3. Borrowed capital
  4. Loan capital
  5. Fixed capital
  6. Liquid capital
  7. Capital employed
  8. Current ratio

Solution

  1. Working capital =          CA      –           CL

CA                  = 475,000 + 360,000 + 46,300 + 103,700

= 985,000

= 985,000        –           585,000

= 400,000 shs

 

  1. Gross capital employed/ net capital employed = fixed assets + working capital

= 1,200,000 + 985,000

= 2,185,000 shs

Net capital employed                                                              = FA + WC

= 1,200,000 + 400,000

= 1,600,000 shs

 

  1. Borrowed capital                                                 = long term liabilities

= 500,000 shs

 

  1. Loan capital                                                 = long time + overtime

= 500,000 shs

 

  1. Fixed capital                                                 = fixed assets

= 850,000 + 230,000 + 120,000

= 1,200,000 shs

 

  1. Liquid capital                                                             = CA –Stock

= 985,000 – 475,000

= 510,000 shs

 

  1. Capital employed                                                 = 1,600,000 shs

 

  1. Current ratio                                                             = CA  = 985,000 :  585,000

= CL = 585,000    585,000

= 1.68      :          1

traders

Find the value of the following;

  1. Fixed assets
  2. Current assets
  • Working capital
  1. Long term liabilities

Calculations

  1. Fixed assets = bicycle + equipment

= 100,000 + 200,000

= 300,000 shs

 

  1. Current assets = stock + debtors + cash

= 650,000 + 10,000 + 120,000

= 780,000 shs

 

  • Working capital = CA –CL

CL                   = Overdraft

= 80,000 shs

WC                  = 780,000 – 80,000

= 700,000 shs

  1. Long term liabilities = debentures

= 200,000 shs

december

 

Calculate

  1. Fixed capital
  2. Current ratio
  3. Liquid capital
  4. Circulating capital
  5. Short term liabilities

 

  1. Fixed capital = fixed assets

FA                   = land + machinery and plant

= 10,000,000 + 8,000,000

= 18,000,000 shs

 

  1. Current ratio = CA

CL

CA                              =        Prepaid rates + debtors + stock + bant

CL                               Profit for the year + creditors + drawings + prepaid income

=          2,0000,000 + 2,000,000 + 3,000,000 + 2,000,000

6,000,000 + 4,000,000 + 1,000,000 + 3,000,000

=          9,000,000

14,000,000

= 9: 14

 

  1. Liquid capital = CA – stock

= 9,000,000 – 3,000,000

= 6,000,000 shs

 

  1. Circulating capital = working capital =CA-CL

= 9,000,000 – 14,000,000

= 5,000,000 shs

 

  1. Short term liabilities = current liabilities

= 14,000,000 shs

Collection

  1. a) Capital employed

WC                              = CA –CL

= 5,000 + 4,000 + 3,000 + 12,000 – 5,000 -8,000

= 24,000 – 13,000

= 11,000 shs

FA                               = Warehouse + fixtures and fittings + van

= 10,000 + 8,000 + 5,000

= 23,000

CE                               =

= 34,000 shs

 

COST OF SALES / SALES AT COST OR COST OF GOODS (COS)

This is the cost of availing goods for scale. There are seven steps involved in calculating cost of goods.

Take note of the opening stock ie this is the stock of goods at the beginning of a new business season

Ascertain the value of goods purchased during the year

Establish if any goods were returned to the suppliers during the year.

These goods are referred to as purchase returns or returns out wards

Get the opening stock to ne purchases. You will get the value of goods available for scale during the year.

Opening stock + (purchase – goods return)

Goods available = opening stock + net purchases

Establish the value of closing stock ie this is the stock of goods not sold at the end of the season.

To arrive at cost of goods sold during the season, subtract closing stock from goods available for sale.

C.O.S = Opening stock + net purchases – closing stock

C.O.S = O.P + N.P – C.S

Example

A trader on 1st – 01 – 2002 had stock worth shs 50,000. During the year, he purchased goods worth shs 500,000 out of which goods worth shs 10,000 were returned to supplies because they were found defective. On 31st December 2002 he still had goods worth shs 60,000 unsold. Find the cost of sales.

C.O.S = O.P + N.P – C.S

= 50,000 + (500,000 -10,000) – 60,000

= 50,000 + 490,000 – 60,000

= 540,000 – 60,000

C.S.O  = 480,000 shs

 

SALES

Sales are the total goods sold in a trading season. It is also referred to as turnover. The formula

Total sales = cost of sales + cross profit

T.S = C.O.S + GP

Net sales = gross profits – returns inwards/ purchases returns

Calculating profits

The profit of a business is usually calculated in two stages;

  1. Gross profit
  2. Net profit

 

  1. Gross profit

It is calculated by subtracting the cost of goods from the amount received from their sales. In other wards it is the excess of sales over cost of goods of an item.

Gross profit     =          sales – cost of sales

G.P                  =          SALES            –         C.O S

It is referred to as gross because its total profit before expenses are deducted eg if a trader brought goods worth 10million and he and he sold them at 5million, his gross profit will be 15 – 10 = 5 million.

 

  1. Net profit

This is profits after all expenses have been deducted from gross profits.

Expenses include transport costs, electricity, wages salaries, insurance, rent, advertisement taxes, depreciation etc

Net profits are more meaningful to a trader than gross profits because all these expenses must be deducted from gross profits to arrive at the real profits.

  • Mark up

In order to ease the calculation of grass profits, some traders may prefer to make a uniform gross profit on all goods they sell. This is done by adding a fix percentage onto the cost of goods. It is then easy to calculate the gross profit since the trader just finds the cost of goods sold and applies the fixed percentage.

G.P = C.O.S X Mark up

Example

If a trader marks up his goods by 10% above his cost of goods worth shs 30,000. Then his gross profit will be.

G.P      = C.O.S x Mark up

= 30,000 x 10/100

= 3,000 shs

NB: mark up is gross profit expressed as a percentage of cost of sales

Mark up           = G.P/C.O.S x 100

  1. Margin

A trader may decide to make a uniform gross profit by adding a fixed percentage to the sales of goods. Gross profit will be calculated by getting sales multiply by the margin.

G.P      = Sales x Margin

Margin is gross profit expressed as a percentage of sales

Margin             = G.P/Sales x 100

Examples

A trader bought goods worth 180,000 shs and sold them at 250,000.

Calculate his mark up and margin

Mark up           =          G.P/C.O.S x 100

Gross profit     =          250,000 – 180,000

=          70,000

Mark up           =          70,000/180,000 x 100

=          38.8 %

Margin             =          G.P /Sales x 100

=          70,000/250,000 x 100

=          28%

Exercise

A trader sells goods at 20% above cost price. His stock on 1st – 01 – 2000 and 31st – 12 – 2000 where shs 3,000,000 and shs 2,400,000 respectively. The cost of sales were shs 21,600,000.

Calculate his sales.

Sales    = C.O.S + G.P

G.P = C.O.S x Mark Up

G.P = 21,6000,000 x 20/100

G.P = 4,320,000

Sales = 21,600,000 + 4,320,000

= 25,92,000 shs

His sales were shs 25,920,000

NOTE: given mark up and total cost of sales one can find turn over or sales with the following formula.

T.O      =          100 + Mark up x C.O.S

100

Or given margin and sales one can find the cost of sales with this formula;

C.O.S              =          100 – Margin x T.O

100

For example

  1. Given a 15% margin and total cost of sales of 25,000 find the turn over.

C.O.S              = 100 – 15 x T.O

100

100 x 25,000   =85/100 T.O x 100

2500,000         =          85 T.O

85                             85

29411.8           =          T.O

Turn over         =          shs 29,411.8

 

STOCK TAKING

Stocktaking is done to enable a trader arrive at the correct gross and net profit figures.

The trader must make a least of all stock held and then find out the value of each of them. Stocktaking is conducted at the end of each financial year.

Stock valuation

This is the act of finding out the value of stock held. Stock may be valued at cost price or market price (selling price).

Average stock

It is the average of opening stock and closing stock given by the formula;

Average stock = opening stock + closing stock

NOTE: when stock taking is done more than twice a year says 5 times a year, to get average stock, all the stock figures are added and divided by the number of times the stock was taken during the year.

Example

January Stock Shs 150,000
February Stock Shs 140,000
March Stock Shs 170,000
April Stock Shs 130,000
May Stock Shs 160,000

Average stock             = 150,000 + 140,000 + 170,000 + 130,000 + 160,000

5

=                      750,000

5

=                      150,000 shs

 

RATE OF STOCK TURN/ RATE OF TURN OVER

This is the number of times that the stock that is held is sold out during a given period. It indicates the speed at which the average stock is sold. If stock turn is three times it means that average stock is sold 3 times a year or once every four months. The rate of stock turn measures the operative efficiency of a business. The higher the figure, the more efficient a business is. This figure can help to compare business in the same line.

Formula for rate of stock turn is;

R.O.S.T           =                     Cost of sales

Average stock at selling price

R.O.S.T           =                     Cost of sales

Average stock at cost price

NB if not specified, and then only use the 2nd formula

Exercise

The accounts of the trader revealed the following figures

Stock on;      first January 2002    shs 600,000
                    31st December 2002  Shs   500,000
                     Net purchase Shs 4,000,000
                    Gross profit markup 40%
                    Expenses for the year     Shs 800,000

 

Calculate

  1. Total cost of sale
  2. Rate of stock turn
  • Sales

Solution

  1. Total cost of sale

C.O.S              =          OP + N.P – C.S

=          6000,000 + 4,000,000 + 500,000

=          4,600,000 – 500,000

=          4,1000,000 shs

  1. Rate of stock turn

R.O.S.T           =          Cost of sales

Average stock at cost price

Average stock at cost price     =         opening stock + closing stock

2

=          600,000 +500,000

2

1,100,000

2

550,000

R.O.S.T                                   =                      4,100,000

550,000

=                      X 7.5

  • Sales

Sales    =          C.O.S + G.P

G.P      =          C.O.S x Mark up

=          4,100,000 x 40/100

=          1,640,000

=          4,100,000 + 1,640,000

=          5,740,000 shs

 

  1. Net profit =          gross profit – expenses for the year

=          1,640,000 – 800,000

=          840,000 shs

Summary of all formulae

  1. Capital owned = T.A- T.L
  2. Working capital = C.A – C.L
  3. Liquid capital = C.A – Stock
  4. Capital employed = F.A +W.C (C.A –C.L)
  5. Borrowed capital = LTL
  6. Loan capital = STL (overdraft) + LTL
  7. Fixed capital = fixed assets
  8. O.S = O.P +N.P –CB or Sales –G.P or = 100- margin x10

= G.P /Mark up x 100

  1. Sales = C.O.S  + G.P or  O = 100+ Mark up /100 x COS

= GP/Margin

  1. Gross profit = sales – C.O.S or C.O.S x mark up or sales x margin

= N.P + Expenses

  1. Net profit = G.P  – Expenses
  2. Mark up = G.P/ C.O.S x 100
  3. Margin = G.P/Sales x100
  4. O.S.T = C.O.S/Average stock at selling price or  C.O.S/ Average stock at cost

NB: rate of stock turn/ rate of turnover/ rate of capital turn over (units times)

  1. Rate of return of capital% =  net profit /capita x 100
  2. Net margin ration = net profit/turnover x 100
  3. Current ratio = CA/CL or CA: CL

Revision

A trader had an average stock of shs 180,000 and a rate of turnover of 3 times. His gross profit was 25% of sales. The expenses were 15% of sales. Calculate;

  1. Sales
  2. Gross profit
  • Net profit
  1. Gross profit mark up

Solution

  1. Sales

Sales    =         C.O.S + G.P

C.O.S =          R.O.S.T x Average stock of cost

=          3 x 180,000

=          540,000 shs                             let sales be x

C.O.S =           Sales – G.P

540,000 =        X – 25X/100

X – 25X/100 = 540,000 x100

100 x – 25x = 54,000,000

75x/75 = 54,000,000/75

X = 720,000 shs

Sales = 720,000shs

  1. Gross profit

Gross profit                 = sales – C.O.S

= 720,000 – 540,000

= 180,000

  • Net profit

Net profit                    = G.P – Expenses

= 15/100 x 720,000

= 108,000

= 180,000 – 108,000

= 72,000 shs

  1. Gross mark up

Gross mark up             = G.P/Cost of sales x 100%

= 180,000/540,000 x 100%

= 33.3%

  1. A trader priced his goods at 40% above cost. His average stock during the year was shs 50,000 his rate of stock turn was 15. His overheads amounted to half his gross profit and the real profit. Net profit represented 25% return of his capital

Calculate

  1. Sales for the year
  2. Net profit
  • Capital

Solution

  1. Sales for the year

Sales                      = C.O.S = + G.P

C.O.S                    = R.O.S.T x Average stock during the year

= 15 x 50,000

= 750,000 shs

Sales                      = (100 + 40)%

= 140/100 x 750,000

= 1,050,000 shs

  1. Net profit

Net profit                    = G.P – Expenses

G.P                        = 1,050,00 – 750,000

= 300,000

Expenses                     = I/2 G.P

= 300,000/2

= 150,000

N.P                              = 300,000 – 150,000

= 150,000 shs

  • Capital

Capital net profit         = 25x/100                    x = Return of his capital

150,000/1= 25x/100

25x/25 = 25x/100

X = 600,000 shs

Capital is 600,000

 

RETURNS

These are items or goods previously sold to debtors or customers that now returned by the debtors. Returns inward may be due to

  • If items are expired
  • If damage in transit
  • If damage in transit
  • If there not asper specifications
  • If not ordered for
  • If they are underweight/ undersized or oversize

NB: once goods have been returned there is need to get the net sales hence sales – sales returns – net sales [turnover].

  • Returns outwards

These are items to the suppliers or creditors. Once returns have been retured, we should find out the net purchases by purchases-purchases returns=net purchases

  • Average stock

This is total of opening stock and closing stock divided by 2

NB: The purpose of average stock is to find out how much stock is sold out on average

  • Rate of stock turn/rate of turnover

This is the number of times a given figure or amount of average stock is sold off in a given trading period. To get the rate of stock turn, take cost of sales divide by average stock.

Example 1

Maddox ltd had the following records

shs

Opening stock                                     910,000

Purchase                                              1,800,000

Returns outwards                                50,000

Sales                                                    2,500,000

Returns inwards                                  70,000

Operating expenses                             100,000

Closing stock                                      300,000

Required;

  1. Cost of sales
  2. Average stock
  3. Rate of stock turn
  4. Gross profit
  5. Net profit
  6. % of gross profit to cost of sales
  7. % of gross profit to turn over

 

 

 

 

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