Gross Profit Ratio of a company is 25%. State giving reason, which of the following transactions will (a) increase or (b) decrease or (c) not alter the Gross Profit Ratio.
(i) Purchases of Stock-in-Trade ₹50,000.
(ii) Purchases Return ₹15,000.
(iii) Cash Sale of Stock-in-Trade ₹40,000.
(iv) Stock-in-Trade costing ₹20,000 withdrawn for personal use.
(v) Stock-in-Trade costing ₹15,000 distributed as free sample.

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Solution

Transactions

Effect on Gross Profit Ratio

Reason

(i) Purchase of Stock-in-Trade Rs 50,000

No Change

Both purchases and closing inventory will increase by Rs 50,000; therefore, cost of revenue from operations will not be affected. So, Gross Profit Ratio will remain same.

(ii) Purchase Return Rs 15,000

No Change

Both purchases and closing inventory will decrease by Rs 15,000; therefore, cost of revenue from operations will not be affected. So, Gross Profit Ratio will remain same.

(iii) Cash Sale of Stock-in-Trade Rs 40,000

No Change

Revenue from operations will increase by Rs 40,000 and Gross Profit will increase by 10,000 (40,000 x 25%), Therefore, both revenue from operations and gross profit will increase by 25%. So, Gross Profit Ratio will remain same.

(iv) Stock-in-trade costing Rs 20,000 withdrawn for personal use

No Change

Both purchases and closing inventory will decrease by Rs 20,000; therefore, cost of revenue from operations will not be affected. So, Gross Profit Ratio will remain same.

(v) Stock-in-Trade costing Rs 15,000 distributed as free sample

No Change

Both purchases and closing inventory will decrease by Rs 15,000; therefore, cost of revenue from operations will not be affected. So, Gross Profit Ratio will remain same.

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Similar questions

Q. Calculate Inventory Turnover Ratio from the following information:
Opening Inventory ₹ 40,000; Purchases ₹ 3,20,000; and Closing Inventory ₹ 1,20,000.
State, giving reason, which of the following transactions would (i) increase, (ii) decrease, (iii) neither increase nor decrease the Inventory Turnover Ratio:
(a) Sale of goods for ₹ 40,000 (Cost ₹ 32,000).
(b) increase in the value of Closing Inventory by ₹ 40,000.
(c) Goods purchased for ₹ 80,000.
(d) Purchases Return ₹ 20,000.
(e) goods costing ₹ 10,000 withdrawn for personal use.
(f) Goods costing ₹ 20,000 distributed as free samples.

Q. Calculate Closing Stock from the following details:

	₹		₹
Opening Stock	20,000	Purchases	70,000
Cash Sales	60,000	Credit Sales	40,000
		Rate of Gross Profit on Cost $33 \frac{1}{3} %$

Q. State giving reasons, which of the following transactions would improve, reduce or not change the Current Ratio, if Current Ratio of a company is (i) 1:1; or (ii) 0.8:1:
(a) Cash paid to Trade Payables.
(b) Purchase of Stock-in-Trade on credit.
(c) Purchase of Stock-in-Trade for cash.
(d) Payment of Dividend payable.
(e) Bills Payable discharged.
(f) Bills Receivable endorsed to a Creditor.
(g) Bills Receivable endorsed to a Creditor dishonoured.

Calculate closing stock from the following details opening stock Rs. 20,000; cash sales Rs. 60,000; credit sales Rs. 40,000; purchases Rs. 70,000. Rate of gross profit on cost $33 \frac{1}{3} %$ .

Q. State giving reason, whether the Current Ratio will improve or decline or will have no effect in each of the following transactions if Current Ratio is 2:1:
(a) Cash paid to Trade Payables.
(b) Bills Payable discharged.
(c) Bills Receivable endorsed to a creditor.
(d) Payment of final Dividend already declared.
(e) Purchase of Stock-in-Trade on credit.
(f) Bills Receivable endorsed to a Creditor dishonoured.
(g) Purchases of Stock-in-Trade for cash.
(h) Sale of Fixed Assets (Book Value of ₹50,000) for ₹45,000.
(i) Sale of FIxed Assets (Book Value of ₹50,000) for ₹60,000.

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Transactions	Effect on Gross Profit Ratio	Reason
(i) Purchase of Stock-in-Trade Rs 50,000	No Change	Both purchases and closing inventory will increase by Rs 50,000; therefore, cost of revenue from operations will not be affected. So, Gross Profit Ratio will remain same.
(ii) Purchase Return Rs 15,000	No Change	Both purchases and closing inventory will decrease by Rs 15,000; therefore, cost of revenue from operations will not be affected. So, Gross Profit Ratio will remain same.
(iii) Cash Sale of Stock-in-Trade Rs 40,000	No Change	Revenue from operations will increase by Rs 40,000 and Gross Profit will increase by 10,000 (40,000 x 25%), Therefore, both revenue from operations and gross profit will increase by 25%. So, Gross Profit Ratio will remain same.
(iv) Stock-in-trade costing Rs 20,000 withdrawn for personal use	No Change	Both purchases and closing inventory will decrease by Rs 20,000; therefore, cost of revenue from operations will not be affected. So, Gross Profit Ratio will remain same.
(v) Stock-in-Trade costing Rs 15,000 distributed as free sample	No Change	Both purchases and closing inventory will decrease by Rs 15,000; therefore, cost of revenue from operations will not be affected. So, Gross Profit Ratio will remain same.