ENTREPRENEURSHIP

Quarter 2 — Lesson 5
Computation of Gross Profit
WHAT I NEED TO KNOW
As we all know that profit is a financial gain from a transaction or from a period of investment or
business activity, usually calculated as income in excess of costs or as the final value of an asset in excess
of its initial value.
It is a total revenue minus total expenses, profit is the amount of money a business "makes" during a
given accounting period. The more profit you make, the better, as profit can be re-invested into the
business or retained by the business owners. Being able to accurately determine your business's profit is
an essential part of being able to judge its financial health. It can also help you decide how to price your
goods and services, how to pay your employees, and more.
To make your business gain more profit, begin by adding up all of the money your business has made
in a set period of time (either, quarterly, yearly, monthly, etc. Other sources, like products sold, services
rendered, membership payments, or, in the case of government agencies, taxes, fees, the sales of resource
rights, and so on.
Note that you will need to subtract any amount of cash refunded to customers for returns or disputes
in order to find an accurate figure for your total income.
It's easier to understand the process of calculating a business's profit by following along with an
example.
Let's say that we own a small publishing business. In the last month, we sold P20,000 worth of books
to retailers in the area. However, we also sold the rights to one of our intellectual properties for P7,000
and received P3,000 from book retailers for official promotional materials. If these represent all of our
revenue sources, we can say that our total income is P20,000 + P7,000 + P3,000 = P30,000.

This module is divided into two lessons:

Lesson 1 – Compute for profits CS_EP11/12ENTREP-0h-j-16

Create the company’s five (5) year projected financial statements
-CS_EP11/12ENTREP-0h-j-17
 To be able to successfully complete this module, previous knowledge in adding & multiplying
numbers will best help.
After carefully studying the contents of this module, you should be able to:

 Identify essential components in computing revenues and costs;

 Differentiate between gross profit, operating profit and netprofit.
 Interpret financial ratios such as the gross profit rate, operating profit margin and
net profit margin.
 Compute actual revenues;
 Compute actual costs;
 Compute gross profit, operating profit and net profit.
 Compute the gross profit rate, operating profit margin and net profit margin.
 Create profit schedules and reports;
 Appreciate the importance of keeping track with the performance of one’s business
through the correct and honest computation and reporting of business profit.
 Appreciate the importance of the correct computation and interpretation of
financial ratios gross profit rate, operating profit margin and net profit margin.
 Lesson
5 Computation of Gross Profit
WHAT’S IN
Let’s review of what is revenue of the business. This is an important tool and materials needed in the
operation of the business. It is said that revenue is the result when sales exceed the cost to produce or
manufacture goods/merchandise as well as costs incurred in selling.
Forecast is advance information that could help us prepare and ready for any incoming event.
Forecasting is the tool used in planning that aims to support management or a business owner in its
desire to adjust and cope up with uncertainties of the future. If anyone of us can predict that we can be
rich so it means all of us will be rich. This fantasy is played out every day in boardrooms across the globe
with the practice of business forecasting.
It is important to have a good organization in the business to easily grow and expand in the future.

WHAT’S NEW
Activity 1
Read and understand the given problem.

Rodrigo is engaged in a buy-and sell business of perfumes. He bought 10 boxes of perfumes. Each box
costs 12,000.00 and contains a dozen of perfume bottles. He is planning to sell one perfume bottle at
P1,500. What is his expected profit on the 10 boxes of perfumes?

The ultimate goal of any business whether a retail or wholesale is to earn a profit. Getting the
difference between the amount of money earned from the selling 10 boxes containing a dozen of perfume
bottles and the cost of those 10 boxes gives the profit.
In the example that I gave, answer the following questions:
1. How much does Rodrigo earn profit?
2. Is it good to engage in a business? Yes or No?
3. What do you think of Rodrigo’s business? Is it good for a beginner?
WHAT IS IT
COMPUTE THE GROSS PROFIT
The profitability ratios are a group of financial statement that primarily determine the profitability of
the business operation.
The gross profit rate on a product is computed as:
Net Sales xxxxxxx
Less: Cost of sales xxxxxxx
Gross profit xxxxxxx

By using the formula, the gross of XYZ Trading in the year 2017
Net Sales P 734, 000.00
Less: Cost of Sales 577, 000.00
Gross Profit 157, 000.00

Profit is the gross income. The amount of gross profit provides information to the entrepreneur
about revenue earned from sales.
The term cost refers to the purchase price of the product including of the product including the total
outlay required in producing it.
The gross profit margin is computed as follows:
gross profit rate = gross

rate

The gross profit rate measures the percentage of gross profit to sales, indicating the profit
that the business realizes from the sale of the product.
The gross profit rate of XYZ Trading for the year computed as follows:

gross profit rate = 46,900.00

734,000.00

The gross profit rate may signal to the entrepreneur that the amount of margin on sales is 21.39%.
This rate will be used to determine whether the amount of gross profit can cover the operating of the
business. Since the gross profit rate of XYZ Trading is 21.39%, the cost ratio to sales will be 78.61%. This
information will help the entrepreneur in assessing whether the cost is too high or too low. Any product
with a very high cost will not become competitive in the market.
 The gross profit rate will also help the entrepreneur set the selling price.

OPERATING PROFIT MARGIN RATE

The operating profit margin is the excess of gross profit from operating expenses.
Gross profit xxxxx
Less: Operating Expenses xxxxx
Operating profit margin xxxxx

The operating profit margin is the second level of revenue in the income statement. At this stage, not
only the cost of buying or making the product that has been deducted is included but also the operating
expenses. These are expenses incurred during a particular period only, and are not expected to provide
benefits to any future period. The operating expenses are also period costs.

In case there are no financing charges like interest, expenses, and income tax, the amount of the

operating profit margin is equal to the net income.

Gross profit P 157,000.00

Less: Operating expenses 90,000.00

Operating profit margin P 67,000.00

This information that the business realized an income of P 67,000.00 during the year after deducting
the cost and operating expenses from the sales made.

Operating Profit
Operating profit margin rate =
Margin Net Sales
By applying
67,000.00
Operating profit margin rate =
734,000.00

The operating profit margin of the business measures the percentage of profit available after
deducting the cost of sales & operating expenses of the business. A higher operating profit margin is
favorable to the business
NET PROFIT MARGIN RATE
 Operating profit margin xxxxxxx
Add: Interest Income xxxxxxx
Total
Less: Interest Expense xxxxxx
Income Tax Xxxxxx xxxxxx
Net Profit margin xxxxxx

The Income statement.is the net profit margin & the third level in the revenue.
The business is only given consideration like interest expense and income tax.
Operating profit margin P67,000.00
Less: Income tax 20,000.00
Net profit margin P46,900.00

The income statement of XYZ Trading does not reflect any data on interest expense. Only income tax
has been deducted from the operating profit-margin.

Net Profit
Net Sales
Net profit margin rate =

By applying the formula, the profit margin of XYZ

46,900.00
Net profit margin rate =
734,000.00

XYZ Trading appears to have earned 6.39% of its total sales of P734,000 during the year. This profits
rate must be compared with those of other similar businesses within the industry.
Analyze the Liquidity Status of the Business

Liquidity Ratios

Current ratio = Current assets / Current liabilities

Quick ratio = (Current assets – Inventories) / Current liabilities
= (Cash and equivalents + Marketable securities + Accounts receivable)/ Current
liabilities
 The quick ratio measures its short-term obligations with its most liquid assets and therefore
excludes inventories from its current assets.

Financial statements are important in a company management as a means of communicating past

successes as well as future expectations. The financial statement records all the operating results such as
sales, expenses and profits or losses.

Return of Investment (ROI)

The Return of investment (ROI) measures the amount of net income per peso Invested to the
business.

The formula to compute ROI is as follows

The average total assets are by dividing the sum of the total assets at the beginning and end of the
period.
Table 1
Projected Five Year Balance Sheet
Fit Mo'to Ready to Wear Online Selling Business
Year 1 Year 2 Year 3 Year 4 Year 5
ASSET
Cash
337,398.56 686,417.05 1,052,886.47 1,437,679.36 1,841,711.89
Total Assets
337,398.56 686,417.05 1,052,886.47 1,437,679.36 1,841,711.89

Liability - - - - -
Owners’
equity 337,398.56 686,417.05 1,052,886.47 1,437,679.36 1,841,711.89
Total
Liabilities
and Owner's
Equity 337,398.56 686,417.05 1,052,886.47 1,437,679.36 1,841,711.89
 Table 1
Projected Five Year Income Statement
Fit Mo'to Ready to Wear Online Selling Business
Year 1 Year 2 Year 3 Year 4 Year 5

Revenue 1,545,673.95 1,622,957.64 1,704,105.53 1,789,310.80 1,878,776.34

Cost 1,213,275.38 1,273,939.15 1,337,636.11 1,404,517.91 1,474,743.81

Gross Profit
Before tax 332,398.56 349,018.49 366,469.42 384,792.89 404,032.53

Yearly increase in revenue is assumed at 5%

Yearly increase in cost is assumed at 5%

As a future entrepreneur, one should always remember that nothing is permanent in the field of
entrepreneurship. What is applicable to one entrepreneur may not be applicable to another. Certain
things may happen to one entrepreneur but may not happen to another.
Entrepreneurship should be practiced not as a science but as an art. Creativity should always be
applied to entrepreneur by regularly evaluating the market and the environment and responding to the
changes in them.
The owner of an ordinary small business has the freedom to manage and operate. Ideally, he/she
prefers business activities which are done easily. However, the entrepreneur has to perform the
entrepreneurial activities correctly regardless of whether they are undertaken easily or not. The
important in entrepreneurship is that the business activities are performed correctly.

WHAT’S MORE
Compute the Gross Profit
Answer the given problem.
1.Annie bought one dozen smartphones for P200,000.00 with a discount of 5%. She sold
half dozen at a price of P18,000.00 per unit. However, a new model of smartphone
became available in the market, so she sold the remaining half dozen @ P12,000.00
each unit. What was her profit or loss?
 Compute the following requirements:
a. Gross profit rate
b. Operating profit margin rate
c. Net profit margin rate
d. Return on Investment

Now ask yourself the following questions:

1. Is creativity present in the operation of ordinary small businesses along

the streets and highways and in your neighborhood? Why do you say so?

2. Do you consider the business practices of small business owners a

form of entrepreneurship?

WHAT I HAVE LEARNED

The profitability and ratios are a group financial statement ratio that primarily determine the
profitability of the business operation. They provide information on the efficiency of resource utilization.
The gross profit represents the difference between net sales and cost of sales of the entrepreneurial
venture during a given period. It is computed as follows:

Net Sales xxxxxx

Less: Cost of Sales xxxxxx
Gross Profit xxxxxx

By using the formula, the gross profit of XYZ Co., in the year 2017 is computed as
follows:
 Net Sales P734,000.00
Less: Cost of Sales 577,000.00
Gross profit P 157,000.00
Profit is determined by:
 the money you get from sales
 the cost of stock – if you're selling a product
 all the expenses you incurred
 Income earned by the business are sales & gross profit. Commissions, discounts, fixed expense
are business expenses.

How to Increase your Sales

 Improve profit by looking at the money you earn from sales, and increase:
o The number of customers
o The volume of goods or services existing customers to buy
o The sales price

WHAT I CAN DO
Conduct an interview of at least three (3) successful business people in your locality,
use the following questions as your guidelines:

1. What made him motivate to start a business?

2. What is the nature of his business?
3. How much capital involved?
4. How many years of existence?
5. Did you consider the population of the community?
6. How much gross profit did you earn for the first year of operation?