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Understanding Profit and Expenses

Business Math

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32 views3 pages

Understanding Profit and Expenses

Business Math

Uploaded by

katekwong225
Copyright
© All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd

Concept Notes:

A person engages in business primarily for profit or return on investments, PROFIT


is the difference between the amounts invested the monetary gain from the
investment. On the other hand, Profit, also called net income, it is the amount of
earnings that exceed expenses for the period, in other words, it is the amount of
income left over after all the necessary and matched expenses are subtracted for the
period.

To determine profit are as follows:


a. Gross means the total or amount without any deductions
b. Net is the remaining amount after deductions
c. Gross Sales indicates the amount received for goods sold
d. Net Sales are obtained when refunds are deducted from the gross sales

Formulas:
Gross Profit = Net Sales – Cost of Goods
Net Sales = Gross Sales – Refund and Allowances
Net Profit = Gross Profit – Operating Expenses

Moreover, an expense is the cost of operations that a company incurs to generate


revenue. As the popular saying goes, “it costs money to make money. Common
expenses include payments to suppliers, employee wages, factory leases, and
equipment depreciation. Businesses are allowed to write off tax-deductible expenses
on their income tax returns to lower their taxable income and thus their tax liability.
However, the Internal Revenue Service (IRS) has strict rules on which expenses
business are allowed to claim as a deduction.
Formulas:
Available Goods = Beginning Inventory + Purchases
Cost of Goods Sold = Available Goods + Ending Inventory

Exercise/Practice/Drill

A. Write P if the statement describes profit and E if it is an expense.


_____1. After deducting operating expenses from gross profit is net profit.
_____2. Company A is paying monthly bills for telephone and postages.
_____3. Net Sales are obtained when refunds are deducted from the gross sales.

B. Match column A with column B and write the letter on the blank provided.
A B
_____1. Available Goods + Ending Inventory a. Gross Profit
_____2. Gross Sales – Refund and Allowances b. Cost of Goods Sold
_____3. Net Sales – Cost of Goods c. Net Sales
Concept Notes:

Formulas in obtaining the profit are as follows:


Gross Profit = Net Sales – Cost of Goods
Net Sales = Gross Sales – Refund and Allowances
Net Profit = Gross Profit – Operating Expenses

For example:
The total sales of Kristen Angel Department Store during the month of
December were ₱5,976.12. The cost of goods during the month was ₱2,324,080.25.
The expenses were as follows: salaries and wages ₱170,910.83; rent P350,000.00;
light and water bills ₱418,265.34; miscellaneous expenses ₱120,450.25; and some of
the merchandize amounted to ₱1,480.980.

Find the (a) gross profit (b) operating expenses, and (c) net profit for the month
of December.
Solution:
Gross Sales ₱5,976, 418.12
Less: Sales Returns ₱1,480,980.00
Net Sales ₱4,495,438.00
Less: Cost of goods sold ₱2,324,080.25
Gross Profit ₱2,171,357.87 (a)
Less: Operating Expenses
Salaries and wages ₱170,910.83
Rent ₱350,000.00
Light and wages ₱418,265.34
Miscellaneous expense ₱120,450.25
Total expense ₱1,059,626.42 (b)
Net Profit ₱1,111,731.45 (c)
Concept Notes:

Formulas in obtaining the operating or expenses overhead are as follows:

Available Goods = Beginning Inventory + Purchases


Cost of Goods Sold = Available Goods + Ending Inventory

Example:

On May 1, the merchandize inventory of Kesten Tires and Battery Supply was
₱165,256.13 and its purchase after that date amounted to ₱110,901.45. On July 31,
the store inventory was ₱98,542.63. How much goods were sold?

Solution:
Beginning Inventory ₱165,256.13
Add Purchase ₱110,901.45
Goods for Sale ₱276,157.58
Less Ending Inventory 98,542.63
Cost of Goods Sold ₱177,614.95

Exercise/Practice/Drill

A. Solve the following problem.

On February 1, Grace Florida’s merchandize inventory was ₱7,463.35. During


the month she purchased additional goods amounting to ₱4,563.15. On March
31, her inventory was ₱6,782.95. What was the cost of goods sold?

Common questions

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Gross profit is calculated by subtracting the cost of goods sold from net sales. Operating expenses are subtracted from gross profit to determine the net profit. This relationship shows how effectively a company is managing its production costs, administrative expenses, and other costs associated with running the business. A higher gross profit with controlled expenses leads to a higher net profit, indicating better financial health .

Increasing operating expenses on marketing could boost short-term sales, potentially leading to higher gross profit. However, it may reduce net profit due to increased expenses. In the long term, successful marketing can enhance brand recognition, potentially resulting in sustained sales growth. Conversely, maintaining expenses may protect short-term net profit but could risk stagnant sales growth. Balancing these choices is crucial for aligning with strategic financial planning .

A business should ensure that expenses are recorded in the same period as the revenues they help generate, typically through accrual accounting methods. This matching principle is essential for financial accuracy as it provides a realistic view of a company's profitability during a specific accounting period, preventing either underreporting or overreporting profits .

The calculation of net profit can differ due to varying accounting policies, differences in operating expenses, tax situations, and cost structures. Factors such as industry-specific costs, the regulatory environment, and management strategies regarding cost control and revenue recognition policies contribute to these differences. Each company tailors these elements to fit its operational reality and strategic goals .

The net sales would be ₱9,500,000, calculated by subtracting the sales returns of ₱500,000 from the gross sales of ₱10,000,000. In financial reporting, net sales provide a more accurate reflection of actual sales performance by accounting for any returns and allowances, which can significantly impact revenue recognition and business analysis .

A company's choice of accounting methods, such as depreciation rates or inventory valuation methods (FIFO vs. LIFO), can significantly impact net profit reporting. For instance, using different depreciation schedules can either inflate or deflate profits. These methods affect investor perceptions by altering apparent financial health, thus influencing investment decisions and market value. Companies need to transparently justify these choices to maintain credibility .

Expenses are subtracted from the gross profit to determine the net profit. This treatment is important because it helps businesses understand their actual profitability by considering all costs associated with generating revenue, ensuring more accurate financial planning and assessment of operational efficiency .

To calculate the net sales, subtract the sales returns and allowances from the gross sales. This calculation is significant because net sales provide a clearer picture of the actual revenue generated from sales activities, excluding any reductions due to returns or allowances, which aids in understanding true revenue performance .

The cost of goods sold is calculated by adding the beginning inventory to purchases made during the period, then subtracting the ending inventory. This metric is critical because it directly affects the gross profit and is a key indicator of how efficiently a company is managing its inventory costs .

Operating expenses play a crucial role in determining a company's net profit as they are deducted from the gross profit. These expenses include salaries, rent, and utilities, and managing them effectively can lead to a higher net profit. High operating expenses can diminish profitability, so their control is essential for maintaining the financial health of the company .

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