Hello,

i am having problems with accounting ratios.

Please help me understan activity ratios and also what does it mean when it is given

20% gross profit on cost or 20% gross profit on Sales.

How do i apply them ahead..

Please help..!

The type of problem that you mentioned requires some basic knowledge regarding the relationship between profit, cost price and selling price. You need not to follow this derivation, but it is only to enhance your understanding of the concept.

Profit = Sales - Cost 

If the question specifies gross profit is 25% on cost, then it means that gross profit is 20% (or 1/5th) on sales. 

On the other hand, if the question specifies gross profit is 25% on sales, then it implies that the gross profit is 1/3rd on cost.

Thus, based on this we can prepare a general rule. You can directly apply these rule in the solutions.

Example: Net Sales is Rs 2,00,000, Gross Profit is 25% on (or above) cost. Calculate the Gross Profit Ratio.

Solution:

In order to clarify your understanding further on Gross Profit and Activity Ratios refer the revision notes at the below mentioned link.

http://cbse.meritnation.com/school-notes/view-pdf/QaSnBrzsoa02fR@9DK7sPg!!

  • 1

 SLAP

S: Solvency Ratios

L: Liquidity Ratios

A: Activity Ratios

P: Profitability Ratios

  • 0

Activity Ratios generally measure its activities in relation to sales. It indicates how fast resources are converted into sales.

Turnover means sales whether at selling price or cost, i.e. cost of goods sold.

  • 0
What are you looking for?