O LevelAccountingCambridge (CIE)Revision Notes5. Preparation of Financial StatementsIncomplete RecordsCalculating Values using Accounting Ratios

Calculating Values using Accounting Ratios (Cambridge (CIE) O Level Accounting)

Revision Note

Donna Simpson

Written by: Donna Simpson

Reviewed by: Dan Finlay

Calculating Values using Accounting Ratios

What information can I find using the margin?

  • The formula for margin 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

Margin

60%

Calculate the value of the cost of sales.

Answer

  • Calculate the gross profit

    • Multiply the revenue by the margin

    • 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 inventory turnover?

  • The formula for inventory turnover is fraction numerator Cost space of space sales over denominator Average space inventory end fraction

    • This is given as a number of times

    • The formula for average inventory is fraction numerator Opening space inventory plus Closing space inventory over denominator 2 end fraction

  • You can use this rate of inventory turnover to find missing values

Cost of sales

Multiply the average inventory by the rate

Average inventory

Divide the cost of sales by the rate

Worked Example

Cogan Lovelace runs a party supplies store.  It is not the practice of the business to keep a full set of accounting records. All sales and purchases are made on a cash basis. The following information is given for the year ended 31 December 2023.

Inventory at 1 January 2023

$60 000

Inventory at 31 December 2023

$75 000

Mark-up

33 ⅓%

Rate of inventory turnover

10 times

Prepare the trading section of the income for the year ended 31 December 2023.

Answer

  • Calculate the average inventory

    • Add the inventory values together and then divide by 2

    • fraction numerator $ 60 space 000 plus $ 75 space 000 over denominator 2 end fraction equals $ 67 space 500

  • Calculate the cost of sales

    • Multiply the average inventory by the rate of inventory turnover

    • $67 500 × 10 = $675 000

  • Calculate the gross profit

    • Multiply the cost of sales by the mark-up

    • $675 000 × 33 ⅓% = $225 000

  • Calculate the revenue

    • Add the gross profit to the cost of sales

    • $225 000 + $675 000 = $900 000

  • Calculate the purchases

    • Cost of sales = Opening inventory + Purchases - Closing inventory

    • Purchases = Cost of sales + Closing inventory - Opening inventory

    • $675 000 + $75 000 - $60 000 = $690 000

Prepare the trading section of the income statement using the usual format.

Cogan Lovelace

Income Statement for the year ended 31 December 2023

$

$

Revenue

900 000

Less: Cost of sales

     Opening inventory

60 000

     Purchases

690 000

750 000

     Less: Closing inventory

75 000

675 000

Gross profit

225 000

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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.