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Calculating Values using Accounting Ratios (Edexcel IGCSE Accounting)

Revision Note

Donna Simpson

Written by: Donna Simpson

Reviewed by: Dan Finlay

Edexcel Accounting: Financial StatementsCambridge (CIE) Accounting

Calculating Values using Accounting Ratios

What information can I find using the gross profit percentage?

  • The formula for the gross profit percentage is fraction numerator Gross space profit over denominator Revenue end fraction cross times 100

    • This is given as a percentage

  • You can use this percentage to find missing values

Gross profit

Multiply the revenue by the percentage

Revenue

Divide the gross profit by the percentage

Cost of sales

Subtract the gross profit from the revenue

Worked Example

The following information is given.

Revenue

$50 000

Gross profit percentage

60%

Calculate the value of the cost of sales.

Answer

  • Calculate the gross profit

    • Multiply the revenue by the gross profit percentage

    • 60% × $50 000 = $30 000

  • Calculate the cost of sales

    • Subtract the gross profit from the revenue

      • $50 000 - $30 000 = $20 000

What information can I find using the mark-up?

  • The formula for mark-up is fraction numerator Gross space profit over denominator Cost space of space sales end fraction cross times 100

    • This is given as a percentage

  • You can use this percentage to find missing values

Gross profit

Multiply the cost of sales by the percentage

Cost of sales

Divide the gross profit by the percentage

Revenue

Add together the gross profit and the cost of sales

  • Revenue = Cost of sales + (Mark-up percentage × Cost of sales)

  • If you know the mark-up and the revenue then you can also find the cost of sales

    • Find the revenue as a percentage of the cost of sales

      • Add the mark-up to 100%

    • Divide the revenue by this percentage to find the cost of sales

Worked Example

The following information is given.

Revenue

$126 000

Mark-up

20%

Calculate the value of the cost of sales.

Answer

  • Calculate the revenue as a percentage of the cost of sales

    • Add the mark-up to 100%

    • 20% + 100% = 120%

  • Divide the revenue by the percentage

    • $126 000 ÷ 120% = $105 000

What information can I find using the profit for the year as a percentage of revenue?

  • The formula for the profit for the year as a percentage of revenue is fraction numerator Profit space for space the space year over denominator Revenue end fraction cross times 100

    • This is given as a percentage

  • You can use this percentage to find missing values

Profit for the year

Multiply the revenue by the percentage

Revenue

Divide the profit for the year by the percentage

Worked Example

The following information is given.

Revenue

$50 000

Profit for the year as a percentage of revenue

10%

Calculate the profit for the year.

Answer

  • Calculate the profit for the year

    • Multiply the revenue by the percentage

    • $50 000 × 10% = $5 000

What information can I find using the return on capital employed?

  • The formula for the return on capital employed is fraction numerator Profit space for space the space year over denominator Capital space employed end fraction cross times 100

    • This is given as a percentage

  • You can use this percentage to find missing values

Profit for the year

Multiply the capital employed by the percentage

Capital employed

Divide the profit for the year by the percentage

Worked Example

The following information is given.

Profit for the year

$10 000

Non-current liabilities

$15 000

Return on capital employed

25%

Calculate the equity.

Answer

  • Calculate the capital employed

    • Divide the profit for the year by the percentage

    • $10 000 ÷ 25% = $40 000

  • Calculate the equity

    • Subtract the non-current liabilities from the capital employed

    • $40 000 - $15 000 = $25 000

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    Author
    Reviewer
    Donna Simpson

    Author: Donna Simpson

    Expertise: Accounting Content Creator

    Donna is a classroom practitioner with over 25 years experience in teaching accounting and business studies at GCSE A-Levels and undergraduate levels, both in the UK and abroad. She currently works for a Multi-Academy Trust (MAT) as a teacher, instructional coach and mentor to other teachers. Donna is also an AQA A Level Accounting examiner as well as the content creator of resources used by all accounting teachers across the Trust. She enjoys designing and creating resources that provides students with deeper understanding of the subject content. Donna has a Bachelor of Science Degree in Business Administration with major in Accounting and Finance (BSc Hons) and ACCA certified to Level 2.

    Dan Finlay

    Author: Dan Finlay

    Expertise: Maths Lead

    Dan graduated from the University of Oxford with a First class degree in mathematics. As well as teaching maths for over 8 years, Dan has marked a range of exams for Edexcel, tutored students and taught A Level Accounting. Dan has a keen interest in statistics and probability and their real-life applications.