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Suppose, Sales = 100% =1

G.P                = 25% of CGS = 0.25 CGS

Sales – CGS = GP

1- CGS = 0.25 CGS

1                       =0.25 CGS + CGS

1                       = CGS(0.25 + 1)

1                       = 1.25 CGS

1/1.25 = CGS

0.8        = CGS

80% of sales = CGS

Sales – CGS = GP

1 – 0.80 = GP

0.20 = GP

20% of sales = GP

Sales – CGS = Operating + Selling & Admin Exp

1 – 0.80 sales = 50,000 + 0.15 sales

0.20 sales – 0.15 sales = 50,000

0.05 Sales                       = 50,000

Sales = 50,000/0.05

Sales = 1000,000

CGS (80% of sales)    = 1000,000 * 80%

= 800,000

GP (20% of sales) = 1000,000 *20%

= 200,000

Income Statement

Sales                                                                              1000, 000

Less: Cost of Goods Sold (CGS)                                       800,000

Gross Profit                                                                      200,000

(15% of sales)

Operating Profit                                                                 50,000

Closing Stock        = Opening Stock + Purchases – CGS

= 500,000 + 700,000 – 800,000

= 1200,000 – 800,000

Closing Stock                 = 400,000

Closing inventory is deducted from cost of goods sold (CGS) because closing inventory is still in hand. According to “Matching concept” only those expenses can be recognized against which we have not recorded any revenue because closing inventory is not sold and still in hand. Therefore we shall not record closing inventory’s cost in CGS and shall deduct from cost of goods sold (CGS).

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Guys...The above calculation is completely wrong.

They have ignored financial expenses of 1% of sales. If we put that in above calculations, the whole result is changed. My solution

Sales = 1,250,000

CGS  = (1,000,000)

G.P = 250,000

Financial, selling and admin exps (15% + 1%) = 200,000

OP = 50,000

Now don't ask complete calculations same solution that i have

Correct

0.25sales – 0.15sales = 50000

0.10 sales = 50000

Sales = 50000/0.10

Sales =500000

 Particulars Amount sales 500,000 Less CGS (375,000) Gross Profit 25%(sales) Less admin expenses 125000 Operating stock (75,000)       50,000 Financial expenses 1%(sales)       (5000) Net profit 45,000

Closing stock = Opening + purchases – CGS

= 500,000 +700,000 – 375,000

= 825000

Suppose,Sales= 100% =1

G.P = 25% of CGS = 0.25 CGS

Sales – CGS = GP

1- CGS = 0.25 CGS

1                      =0.25 CGS + CGS

1                      = CGS(0.25 + 1)

1                      = 1.25 CGS

1/1.25 = CGS

0.8        = CGS

80% of sales = CGS

Sales – CGS = GP

1 – 0.80 = GP

0.20 = GP

20% of sales = GP

Sales – CGS = Operating + Selling & Admin Exp

1 – 0.80 sales = 50,000 + 0.15 sales

0.20 sales – 0.15 sales = 50,000

0.05 Sales                       = 50,000

Sales = 50,000/0.05

Sales = 1000,000

CGS (80% of sales)    = 1000,000 * 80%

= 800,000

GP (20% of sales) = 1000,000 *20%

= 200,000

Income Statement

Sales                                                                              1000, 000

Less: Cost of Goods Sold (CGS)                                       800,000

Gross Profit                                                                  200,000

(15% of sales)

Operating Profit                                                 50,000

Closing Stock        = Opening Stock + Purchases – CGS

= 500,000 + 700,000 – 800,000

= 1200,000 – 800,000

Closing Stock                 = 400,000

Closing inventory is deducted from cost of goods sold (CGS) because closing inventory is still in hand.According to “Matching concept” only those expenses can be recognized against which we have not recorded any revenue because closing inventory is not sold and still in hand. Therefore we shall not record closing inventory’s cost in CGS and shall deduct from cost of goods sold (CGS).

Right solution

Definition of markup:

Markup is the difference between the cost of a good or service and its selling price.

So basically markup is the amount of gross profit

In our case, Gross profit is 25% of cost of goods sold. Since we have no defined ratio of profit margin therefore, we can convert markup into margin through standard procedure:

1st we convert the markup into fraction i.e. 1/4

To convert markup into margin, we add +1 to denominator i.e. 1/5

1/5 = 20%

GP/Cost=25%

GP/Sales=20%

OP Expense/Sales=15%

20% - 15% = 5% = 0.05 (Operating Margin)

To find Net sales we use the formula for finding operating margin i.e.

Operating Margin = Operating Income/Net Sales

0.05 = 50,000/Net Sales

Net Sales = 50,000/0.05

Net Sales = 1,000,000

For COGS,

Cost of goods sold = 80% of Sales (Since GP is 20% of Sales)

80% x 1,000,000 = 800,000 = Cost of goods sold

Ending Inventory = 500,000+700,000-800,000 = 400,000

Thnx farukh budy